NCPA - National Center for Policy Analysis

Congress Should Not Authorize States to Expand Collection of Taxes on Internet and Mail Order Sales

April 19, 2012

Congress has under consideration legislation to allow states to require out-of-state businesses that have no connection to the state, other than taking orders over the Internet, by mail or by telephone from in-state customers and sending the ordered goods by common carrier or U.S. mail, to become sales tax collection agents for the states, says David Addington, vice president of domestic and economic policy at the Heritage Foundation.

The legislation would overturn the Supreme Court's decision in Quill Corporation v. North Dakota, in which it prohibited the state sales taxation of businesses that have no nexus of activity within the state.  States are clamoring for the legislation to be passed so that additional revenues can be realized.

  • State government politicians have deceptively argued that the legislation is not a tax hike, because it would not affect rates in any state or introduce any new taxes.
  • This sidesteps the point that the legislation would grant tax laws already on the books a wider breadth as they impose on out-of-state businesses contracting with in-state residents.
  • The National Conference of State Legislatures (NCSL) has noted that in 2012, states will collectively lose an estimated $23.3 billion in uncollected sales taxes from out-of-state sales.
  • Members of the NCSL argue vehemently that the additional revenue is necessary to help close major budget gaps (states had to close shortfalls totaling $72 billion leading into the FY 2012 budget process).

The implementation of this kind of law is dangerous for a number of reasons.  First, it will almost certainly discourage additional efforts by states to tighten budgets through reduced spending.  Easy revenue from out-of-state sources would make for a more convenient way to finance spending.

Second, the legislation would favor some states over others.  The most glaring example of this occurrence is the legislative outcome for the state governments of Delaware, Montana, New Hampshire and Oregon -- states that collect no sales taxes.  Their in-state businesses would be forced to pay out-of-state sales taxes while these state governments collect no additional revenues.

Finally, the proposed legislation would harm competitive and free-flowing markets by offering states a taxation tool to use against out-of-state businesses in order to protect in-state brick-and-mortar companies.

Source: David Addington, "Congress Should Not Authorize States to Expand Collection of Taxes on Internet and Mail Order Sales," Heritage Foundation, April 6, 2012.

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