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Tax Simplification is Simply a Mess

By: Jennifer Holder, Executive Vice-President, NoInternetTax.org

Last fall as debate on the Internet tax moratorium heated up, Governor Locke and 41 of his peers sought an amendment to the Internet Tax moratorium last fall that contained language for “streamlining” efforts, more commonly known within the National Governor’s Association as the Streamlined Sales Tax Proposal, or SSTP.

Congress, including “no” votes by Sen. Murray and Sen. Cantwell, overwhelmingly rejected the amendment and extended the moratorium for two years. Despite defeat on a national scale, Governor Locke and his peers haven’t given up easily. Some states, like Michigan, have ignored constitutional provisions that require Congressional authorization to enter into agreements to levy taxes beyond their borders.

Many, including Washington where streamlining has manifested itself under the guise of HB 2608 and SB 6342, have already introduced legislation to enter into a compact, or tax cartel, to begin the “streamlining” process to recover “lost” tax revenues from e-Commerce sales.

The General Accounting Offices, in a report issued in 2000, noted “little empirical data exist on the key factors needed to calculate the amount of sales and use tax revenues that state and local governments lose on the Internet and other remote sales. What information that does exist is often of unknown accuracy.”

On the surface, “streamlining” seems to make sense by proposing to simplify existing definitions, rules, and tax rates levied by more than 7,600 taxing entities across America. Scratch that surface and we believe that you will find that the measure violates consumer privacy, constitutes taxation without representation and is otherwise wholly unconstitutional.

Proponents of “streamlining,” including the National Governor’s Association and National Conference of State Legislatures, would have you believe that this is not a tax increase, but rather a fairness issue. They argue that e-Commerce firms are killing Main Street business as their customers do not have to pay sales taxes, nor are they faced with the burden of sales tax collection.

In reality, e-Commerce represents less than .9% of all retail transactions in the United States, according to the U.S. Department of Commerce. Most of the transactions that occur online are for activities such as business-to-business commerce, travel and financial transactions, which are typically not subject to taxation, whether on or off line.

The truth is this debate has never been about whether or not to tax the Internet. Currently, taxes apply to e-Commerce in the exact same manner as they do for catalog, television and telephone sales. This debate is about the collection of usage and sales taxes.

The U.S. Supreme Court has twice ruled, most recently in 1992 in Quill v. North Dakota, that it is unconstitutional for a state to force an out of state vendor to collect and remit taxes to a state where they have no physical presence, or nexus. To do so creates an undue burden on business that violates the commerce clause.

The Governors’ appeal on behalf of “streamlining,” attempts to nullify this ruling by providing for a single sales tax rate which would presumably reduce the burden of sales tax collection on businesses. However, the creation of a single tax rate between states results in a de facto national sales tax, decreasing tax competition and stripping states of their taxing power granted by the U.S. Constitution.

We have found that Americans are extremely concerned about the “cartel” proposals to either create a national sales tax collection center or contract out tax collection to “trusted third parties.” Consumers are worried that the formation of such a national database will monitor their personal information and shopping habits, without regard to their privacy.

In Washington State, both HB 2608 and SB 6342 call for the establishment of third-party certified service providers as agents of the sellers for the purposes of collecting and remitting sales and use taxes and assign liability to these providers for the collection and remittance.

According to Zogby International polling data released on August 15, 2001, 66% of those polled oppose Congressional consideration of a law, which would force Internet merchants to begin collecting sales tax.

Consumers have also expressed concern that by expanding taxation on e-Commerce transactions for tangible goods, the door may be opened in the future to bring taxation to non-tangible items such as downloads, software and other digital goods and services.

Finally, what “streamlining” advocates won’t tell you is that the model legislation increases the tax burden on consumers. A similar measure passed in Michigan allows the state to collect an additional estimated $3.9 billion dollars in tax dollars from its citizens over the next ten years, according to a Mackinac Center econometric study.

The same study shows the “streamlining” legislation or more accurately, tax increase, could cost the state of Michigan up to 4, 700 jobs. Given the state of Washington’s own fragile economy and reliance on the technology sector, can we afford the risks that accompany HB 2608 and SB 6342?

Our group is also greatly concerned with the estimated cost of the streamlining effort and the new bureaucracy that it would inevitably create. We have attempted to contact both the National Governor’s Association and the Streamlined Sales Tax Project offices to obtain cost information for expenditures to date, total projected project cost and estimated implementation cost per state. Both offices acknowledged that they do not have this information. In short, they have no idea what their proposal will cost taxpayers, nor if the effort will actually be cost-beneficial to implement in an effort to “save” their so-called “lost” tax revenues.

Quite simply, attempts to “simplify” violate consumer privacy and are wholly unconstitutional. “Streamlining” legislation is an unconstitutional Pandora’s box that could shatter the foundations of the digital economy in the United States and violate each individuals citizen’s right to privacy.

Recently, the Washington State Senate passed streamlining legislation and final passage now relies upon the action of the House. Call your State Representative today and tell them to vote no!

Regardless of what they’re calling it—simplifying, streamlining or leveling the playing field, it all adds up to yet another route for the government to impose a tax.


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