Rep. Jason Chaffetz, R-Utah, recently introduced legislation to allow state tax collectors to require out-of-state retailers to collect taxes for them, even if the retailer has no connection to their state.
Called the Remote Transactions Parity Act (H.R. 2775), it has, like similar bills before it, troubling implications for Internet commerce and for principles of federalism. Under a 1992 Supreme Court decision known as Quill v. North Dakota, states have only been allowed to impose their tax rules on businesses if the business has some physical presence in their state, such as a store, factory or warehouse.
State tax collectors have long chafed under the Quill rule, as it limits their revenue. Other Quill critics argue that the rule creates an unlevel playing field between out-of-state, Internet retailers who need not collect sales taxes and locally-based “brick and mortar” firms who do. Customers, they argue, should have to pay the same amount of tax on a purchase regardless of where they buy a product.
After years of lobbying Quill by critics, the Senate last year passed the “Marketplace Fairness Act,” which would have subjected retailers to tax authorities from all 50 states. This would have created more problems than it solved, placing a heavy administrative burden on small to mid-sized Internet businesses, while freeing tax authorities to impose burdens on out-of-state—and therefore politically unrepresented—business owners.
Chaffetz’s new proposal is touted as a compromise that avoids these problems. Among the differences with the bill passed by the Senate last year, it limits audits of firms with under $5 million in sales, and shifts some liability for under-collection of taxes away from retailers and to tax software providers.
These changes do little to solve the fundamental flaws with allowing state tax collectors to extend their authority to out of state retailers with no physical connection to their state. The problems are deep, ranging from the burdens placed on retailers to the erosion of principles of federalism. It is simply another failed attempt at increasing taxing of online commerce that creates more problems than it solves.
