Last month, ATR joined the American Family Business Institute in supporting Indiana Sen. Jim Banks' bill to eliminate the state's death tax. The bill would scrap a particular damaging extra layer of taxation that drives wealth and population across state lines.

Recently, Senate Appropriations Chair Luke Kenley gave credence to the idea of scrapping the tax. Unfortunately, he feels the need for a "pay for" tax increase to replace the revenue currently generated by the death tax. His weapon of choice is a new tax on online sales.

This is a bad idea. First of all, there is no need to "replace lost revenue" from a tax cut. Indiana currently projects a mid-year surplus of $1.77 billion. This is the time to reduce the tax burden; there is no need to inflate the spending baseline by keeping the surplus in state government's hands.

But even more importantly, taxing the internet is unconstitutional and inflicts undue punishment in-state advertising businesses, who generally have closed up shop in states where such a tax has been imposed. From Grover's and AFBI's Dick Patten's letter to Sen. Kenley today:

Taxing Internet sales is an especially problematic idea. The U.S. Supreme Court’s ruling in Quill v. North Dakota enshrined the physical nexus standard for tax collection into law by forbidding states from forcing out-of-state companies (Internet or otherwise) with no physical presence to collect taxes. Taxing online sales is an issue for the U.S. Congress to review, as state-level attempts to dissolve the physical nexus standard violate the Commerce Clause of the U.S. Constitution solely to raise taxes.

Internet taxes also have a proven history of punishing in-state advertising businesses, which often serve as the nexus for out-of-state online retailers. In every state the affiliate nexus tax has been enacted, retailers have terminated advertising agreements to avoid the unconstitutional tax, causing tens of thousands of in-state companies to close up shop or flee the state.

To read the entire letter, see below. For a PDF,click here.

January 5, 2012

Senator Luke Kenley
200 West Washington Street
Indianapolis, IN 46204

Dear Chairman Kenley:

We write in response to your recent comments on the need to replace revenue “lost” by eliminating Indiana’s inheritance tax with a new tax on online sales. While I applaud you for adding legitimacy to current efforts to repeal the death tax, the savings to taxpayers should remain in the private economy. We feel strongly that the Indiana legislature should refrain from implementing a new, constitutionally dubious tax increase on Internet shoppers.

Due to the fiscal prudence of your legislature and Gov. Mitch Daniels, Indiana boasts a projected $1.77 billion surplus. This is the time to be reducing the state’s tax burden, not shifting it from one activity to another.

Taxing Internet sales is an especially problematic idea. The U.S. Supreme Court’s ruling in Quill v. North Dakota enshrined the physical nexus standard for tax collection into law by forbidding states from forcing out-of-state companies (Internet or otherwise) with no physical presence to collect taxes. Taxing online sales is an issue for the U.S. Congress to review, as state-level attempts to dissolve the physical nexus standard violate the Commerce Clause of the U.S. Constitution solely to raise taxes.

Internet taxes also have a proven history of punishing in-state advertising businesses, which often serve as the nexus for out-of-state online retailers. In every state the affiliate nexus tax has been enacted, retailers have terminated advertising agreements to avoid the unconstitutional tax, causing tens of thousands of in-state companies to close up shop or flee the state.

Eliminating the death tax is a worthy goal in and of itself. The tax chases monetary and human capital across state lines and discourages hard work, productivity, and savings. Farmers are punished as they pass along land and equipment to the next generation and citizens who pay taxes their entire lives are unfairly hit with yet another layer of taxation after passing away.

The difference between smart government and wasteful government what is what one does when surpluses are realized. Gov. Daniels has the right idea with his automatic refunds of surplus dollars to taxpayers. You should follow suit. Rather than replacing one bad tax with another, it’s time to seriously reduce Indiana’s tax burden and allow the private sector to grow. If you have any questions about ATR or AFBI’s position on this issue, please contact Indiana State Affairs Manager Joshua Culling at jculling@atr.org or Palmer Schoening at Palmer@AmericanFamilyBusinesses.org.

Onward,

Grover Norquist
Americans for Tax Reform

Dick Patten
President, American Family Business Institute

CC: The Honorable Mitch Daniels