Divide-and-conquer is a tried-and-true strategy to defeat a superior enemy. It works in war and in business, but perhaps nowhere more so than in politics. When it comes to online sales tax, state tax administrators and legislators managed to divide the retail business community in their drive to gain new tax powers at the expense of consumer choice and small business growth.
Earlier this year, South Dakota began taxing out-of-state sellers who made sales to state residents. This is not only unprecedented; it is also unconstitutional, since it defies over 200 years of constitutional doctrine, most recently affirmed in 1992. NetChoice joined the American Catalog Mailers Association in filing a lawsuit against South Dakota’s new law, which could take two years to reach the U.S. Supreme Court.
Meanwhile, state lawmakers have promised to copy the South Dakota strategy in their states, along with a battery of nuisance bills to extend and distort the federal doctrine whereby a state can only tax businesses that have a physical presence in their state.
How does South Dakota think they will get away with this?
By dividing the business community. National retailers like Walmart, Target, and Amazon have physical presence in nearly every state and have the resources to navigate the labyrinth of 10,000 sales tax jurisdictions. So there’s no incremental burden for big sellers, while there’s a big burden for small sellers to collect for every state. At the same time, state legislators have convinced small businesses that they are being run out of business by out-of-state online sellers who do not have to charge sales tax.
It doesn’t have to be this way, where retail businesses are played against each other. In fact, a retailer in South Dakota that sells to out-of-state customers has way more in common with a similar retailer in New York than it does with a store next door. If other states copied the South Dakota law, businesses that thought things would be better would face sales tax audits from across the country and software changes that cost hundreds of thousands of dollars.
The states’ game—as played by South Dakota—is to harass American retailers while asking Congress and the courts to give them new powers to tax out-of-state businesses.
Sixteen years ago, states formed the Streamlined Sales Tax Project to “find solutions for the complexity in state sales tax systems.” But states have continually reneged on their promises, allowing states to keep 10,000 tax rates, different rounding rules, conflicting product definitions, and separate audit powers.
It is time for retailers across the nation to realize they can either stand together, or stay divided and fall prey to state tax authorities. Only Congress can force states to dramatically simplify their sales tax regimes and restrain the power of tax auditors.
Rep. Bob Goodlatte (R-VA), chairman of the U.S. House Judiciary Committee, has a plan to administer sales tax based on the location of the seller, not the buyer. If the system sounds familiar, it is. We use that system every day at brick and mortar stores: When a California family buys souvenirs on a trip to New York City, they pay New York sales tax—the New York seller doesn’t have to figure out and file taxes for the family’s California residential district.
Let’s put this system in place so that Internet sellers, catalogs, big-box retailers and main street businesses are finally all on a level playing field. It’s time for retailers of all shapes and sizes to realize that united we stand, but divided we fall prey to the states’ campaign to gain new tax powers over businesses everywhere.
NetChoice is a trade association that represents online retailers and e-commerce companies.Favorite