Politically Direct: State Tax-Obsessed Politicians Propose Internet Tax That Would Stifle Innovation, Says Internet Alliance

By Emily Hackett

Executive Director, Internet Alliance

April 1, 2009 — State lawmakers seemingly cannot resist targeting the Internet for more revenue. So far this year, seven states are considering a controversial tax that would require many online retailers to begin collecting sales taxes on purchases shipped to the state, even if they have no operations or employees working there.

The Internet Alliance opposes this type of tax, as it would inhibit commerce and communications with out-of-state businesses and consumers. The Internet Alliance and its member companies have worked with state officials across the country to break down artificial, unnecessary, and counterproductive barriers like these types of taxes.

California, Connecticut, Hawaii, and Minnesota have legislation pending, while Illinois and North Carolina are expected to introduce measures in the next few weeks.

The US Supreme Court (see Quill Corp. v. North Dakota, 504 US 298 (1992)) has made plain that physical presence, or nexus, is necessary for states to compel companies to serve as tax collectors. Therefore, these attempts to redefine nexus are not only poor tax policy, but they are also clearly unconstitutional. This type of legislation would impermissibly attempt to require remote sellers with no physical presence in these states to collect and remit tax based on advertising dollars spent there. A mere advertising relationship – the basis of these proposals – would not constitute physical presence.

This type of tax strikes at the very heart of e-commerce. While it may not be intended, these nexus provisions only discourage remote sellers from compensating a range of organizations, businesses, and individuals from hosting advertisements in these states. Ultimately, it will be these entities that lose out, as remote sellers move their marketing dollars elsewhere leaving the states without any additional revenue. Additionally, the technology sector in these states would be negatively affected, as remote sellers would be likely to reconsider using websites hosting services in those states.

If these measures are enacted, taxpayers will inevitably be the ones to incur the cost of defending these unconstitutional laws. Determining whether a remote seller “directly or indirectly” was able to obtain sales through a resident of a state that assists in soliciting Internet sales is hardly a precise standard, and will most likely result in protracted litigation.

Moreover, state resources spent by state agencies in pursuing those subject to the tax under these new provisions would be better spent seeking the collection of taxes from those it can permissibly tax.

The Internet Alliance realizes that states are facing an unprecedented fiscal crisis. However, creating this type of tax instead of cutting state spending would harm the economy at the worst possible time. Instead of targeting the Internet for more revenue, states should tighten their spending.

The economic growth created by the Internet is already a rich source of income tax revenue for the states, not to mention “real world” sales taxes collected from Web-based employees who spread their wealth around. Internet taxes would discourage online firms from hiring and expanding, and thus create an entirely unnecessary long-term drag on the economy, killing jobs.

Legislators should be working on measures to strengthen Internet commerce, rather than placing undue burdens that would weigh it down in return for the theoretical gain of a projected retail taxation opportunity.

About Emily Hackett and the Internet Alliance:

Emily Hackett is executive director of the Internet Alliance (IA), which is a leading advocacy organization of policy professionals representing the Internet industry in all 50 states. The IA’s mission is to promote confidence and trust in the Internet so it can reach its potential as the most dynamic market medium of this century.

The IA advocates for the Internet industry and e-commerce on issues important to consumers and businesses. The IA takes a positive and proactive approach to the policy dialogue by developing consistent and strategic core messages in several policy areas affecting consumers and businesses’ bottom line.

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