Out of Control Policy Blog

A Very Taxing Internet

As if filing my taxes weren't depressing enough, now comes this story about a renewed push to force e-tailers to collect sales taxes for on-line purchases. Ugh.

The whole issue of why most on-line sales are technically tax-free is one of the more interesting areas in the arcane backwater of tax policy. Currently, states can only force companies to collect sales taxes if they have a physical presence or "nexus" with the state or locality. (employees, warehouse, etc) The threshold was established by the 1992 Supreme Court case, Quill v. North Dakota, one of the "most awesomest" decisions ever. (More importantly, the case reaffirmed National Bellas Hess, the previous holder of the most awesomest title.)

Now, technically the transaction is still taxable, through a constitutionally dubious (my view) device called a "use tax". But, the state or locality would have to collect it directly from individuals, an administratively nightmarish scenario.

Predictably, state and local officials have raised a considerable ruckus about this. They have long predicted that it would bring about the "end-times' and seriously erode their budgets. I first started working on this issue in 1997, when total state and local government spending was around $1.5 trillion, roughly 18% of GDP. In 2005, (the last year full figures are available, state and local spending was $2.3 trillion, or around 19% of GDP. (Figures here) So much for erosion.

Michael Flynn is Director of Government Affairs


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