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April 24. 2013 2:16AM

Charles M. Arlinghaus: How the Internet sales tax would unravel the NH Advantage


 

Other states have always been annoyed by states like New Hampshire that don't have a sales tax. Tax competition is distressing to the uncompetitive. But few tax grabs are as ill-considered, unfair and anti-competitive as the federal government's attempt to impose a massive new Internet sales tax.

New Hampshire in particular needs to be careful. The new tax will lead to the elimination of the sales tax competitive advantage that is the foundation of our retail economy.

Under the American tax system, states may apply taxes to entities that have a physical presence (or "nexus") in the state. It would of course be ridiculous to expect an orange grower in Florida to apply your state's sales tax on fruit you buy on vacation or to exempt you if you came from a state with no sales tax. So, in general, one state's tax collector has no authority to reach across state lines and regulate you from beyond the borders.

For decades, mail-order catalogs annoyed state tax collectors. Because they weren't located in a state, they didn't pay taxes to that state just because a local placed an order. After many skirmishes, the U.S. Supreme Court sided with the retailer and ruled that taxing a company with no state presence was a violation of the interstate commerce clause.

If mail order companies annoyed tax collectors, the Internet angered them even more. My buying a shirt or book online and not paying sales tax apparently threatens the foundations of democracy.

By the way, how much of a threat to regular stores do you think the Internet is? It's less than you think. Total retail sales in 2012 were $4.3 trillion. The e-commerce share of sales was 5.2 percent of that total.

Nonetheless, Congress is trying to pass a law to force every Internet retailer to collect sales taxes for every jurisdiction in America. That's not 50 different tax schemes. There are 9,646 different tax schemes. For example, in Chicago you would pay sales taxes on a purchase to four different entities - five different ones on certain purchases.

If you are a giant retailer like Amazon.com, this is less of a problem for you because of your size, so you support the law. It won't put you out of business, but it will be a nightmare for your smaller competitors. If you are a small, home-based retailer that does a little business through eBay, you'll just go out of business. Thank you, Congress.

So far, Congress is only punishing the e-commerce people. For the 95 percent of sales that go to "brick-and-mortar" stores, this tax-collection scheme is considered burdensome. (I'm not sure what the pinheads in Congress think it is about using the Internet that makes a regulatory burden not a burden to business conducted online, but then logic is not Washington's strong suit).

Don't expect the state tax collectors to be content with leaving the physical stores alone. Massachusetts has been trying for decades to force New Hampshire retailers to collect sales and use taxes from Massachusetts residents. The Internet sales tax bill gives Massachusetts both a mechanism and a precedent.

If we can force mail-order and Internet companies to collect taxes for more than 9,000 jurisdictions, then how hard will it be for Massachusetts to force tire stores or appliance stores to collect its taxes? The day is not long off when Massachusetts brings action under the new scheme to force our state liquor stores to collect and remit Massachusetts taxes on all those cross-border sales.

Sens. Kelly Ayotte and Jeanne Shaheen are both opposed to the bill, but the New Hampshire Legislature is technically helping to fund the effort to tax us. The Legislature pays dues to the National Conference of State Legislatures ($126,761 annually to NCSL and others in the current budget draft). The NCSL is pushing this bill as some sort of state tax relief (I'm not making that up) and promises to "continue to advocate vigorously for" the new tax. (By the way, New Hampshire House Speaker Terie Norelli is president of the NCSL.)

When the federal government interferes in state tax policy, it is never to help you pay less. Somehow "reform" always involves you paying more and the politicians having more to control.

Should every retail business in America, large or small, have to collect taxes for all 9,646 different tax jurisdictions? Garage sales, flea markets, the guy selling old records on eBay, an out-of-print book I bought by mail from England?

Congress should stick to destroying the federal government. It's good at that. But I wish it would leave state tax policy alone.

Charles M. Arlinghaus is president of the Josiah Bartlett Center for Public Policy, a free-market think tank in Concord.


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