As many states move forward with pro-growth spending and tax reforms, a couple of state legislatures are taking steps in the opposite direction. Legislators in Virginia and Kansas are advancing bills that seek to dissolve the physical nexus standard in their respective states and implement an Internet sales tax on out-of-state companies. This type of tax will not only kill jobs and close down businesses, as it has done in other states, but it is also entirely unconstitutional.
In Kansas, SB 371 moves to push the long arm of the tax collector past its appropriate state boundary and count third-party online advertisers as a physical nexus of the larger companies for which these entities advertise. So, for example, an ad on the Kansas City Star’s website for an online retailer based in California would now mean that retailer has to collect tax in Kansas. Not only does this fly in the face of the U.S. Supreme Court’s Quill v. North Dakota decision, which holds that an out-of-state retailer cannot be forced to collect taxes for the state, but a similar measure is already undergoing a legal challenge in New York. As the history of Internet taxation has shown, these new taxes do nothing to level the playing field with brick-and-mortar businesses, but will put Kansan advertisers out of work and fail to raise revenue for the state. In the states in which an affiliate nexus tax has already been passed, online retailers have terminated contracts with in-state advertisers to avoid this unconstitutional tax, causing tens of thousands of residents to go out-of-business. ATR sent a letter to the Kansas legislature urging them to vote against SB 371. The letter can be found here.
The legislation in Virginia (SB 597) would force out-of-state businesses to notify Virginia residents of their “use tax” obligations, a measure which could also face a legal challenge. A similar reporting requirement law in Colorado recently received a preliminary injunction as it also goes against the precedent set forth in Quill by violating the Commerce Clause. The court’s ruling in Colorado was that the state could not impose any “notice and reporting obligations” on out-of-state companies, particularly when in-state companies do not have these same requirements. Along with the constitutional concerns, the new tax would also deter in-state investment by forcing collection obligations on companies that take even a very small ownership stake of a company in the state. It will encourage remote sellers to expand their operations to other states that do not have similar requirements. Hardly the type of legislation Virginia needs to move forward its economic growth. ATR recently sent a letter to the Virginia legislature urging them to vote against this measure. Click here to read the full text.
A number of other states also have similar legislation moving forward: Minnesota (HF 1849), Maryland (SB 152), Arizona (HB 2804), Mississippi (HB 135), Missouri (HB 1569), and New Jersey (SB 1305). Iowa has a comparable initiative moving forward, and Maryland will be holding a hearing on Internet taxation in the near future. It is important that these state legislatures keep in mind the dubious constitutionality of Internet taxation, as well as the effect that it would have on in-state business.
For an in depth look at the issue, check out a video (below) of ATR’s Kelly William Cobb on an Internet tax panel at the International Students for Liberty Conference held in Washington, D.C. Andrew Moylan of the National Taxpayers’ Union and Joe Henchman of the Tax Foundation were also featured on this panel.