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The U.S. Supreme Court has ruled that state and local governments cannot force out-of-state companies to collect taxes for them, since this would interfere with interstate commerce. States and localities may only require companies with a "substantial physical presence" or "nexus" in their state to collect sales taxes. That's as it should be.
But some public officials aren't content with that ruling. Gov. Engler, for example, strongly supports a National Governors' Association (NGA) proposal that would apply sales taxes to virtually all Internet, catalog, and 1-800 number purchases. Labeled the "Streamlined Sales Tax Project," the proposal would deputize a private "third-party entity" to collect and distribute those taxes and could—if enough states approve it and Congress endorses it—open the door to a national sales tax.
Supporters of the NGA plan talk a lot about fairness and the need to "harmonize" states' sales taxes. But what's to fear from diversity in either the manner or the amount that states tax? It's not "unfair" that New Hampshire has neither a sales nor an income tax. Nor is it unfair that items on which some states impose a sales tax are exempted by other states. Michigan "loses" revenue all the time to states that tax less and tax better, and it gains revenue over states that tax more and in more harmful ways. That's healthy tax competition, and it's why the states are often called "laboratories of democracy."
What concerns me are such things as compromising any one state's sovereignty over its tax structure in the name of "streamlining" or harmonizing it with the tax structures of other states. I'm concerned about scrapping the privacy and anonymity inherent in the sales tax. And I'm concerned about making it much easier for the federal government to superimpose a national sales tax.
But back to the fairness issue. Is it fair that Michigan bricks-and-mortar businesses must remit to the state a sales tax while their out-of-state competitors do not? Taxes are supposed to pay for services that governments provide, such as police protection. Out-of-state vendors with no physical presence in a state would not use any government services in that state. So it would be unfair to tax out-of-state Internet, catalog, or 1-800 companies.
Advocates of the NGA scheme argue that their plan is designed simply to collect existing sales or use taxes from Michigan consumers, not impose a new tax on out-of-state companies. But that argument is undermined by the fact that a consumer who orders a book from Amazon.com isn't using the roads or any other state service to make his purchase.
And privacy concerns about the NGA plan are certainly justified. When you pay a sales tax at a local shop, no one asks you your name, where you live, or anything about your buying habits. The third-party entity the NGA plan would deputize to facilitate Internet tax collection and revenue distribution may very well need to know such things to do the job.
Additionally, claims by state governments that they're "losing" revenue on Internet transactions are almost always inflated for these and other reasons:
Some say the effort to impose sales taxes on all Internet transactions is a train rolling down the track. Maybe so, but it's still a train that should be derailed.
(Lawrence W. Reed is president of the Mackinac Center for Public Policy. Permission to reprint in whole or in part is hereby granted, provided the author and his affiliation are cited.)
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