Last winter we opened up a discussion on the Marketplace Fairness Act and the idea of the federal government forcing companies such as Amazon and eBay to collect a sales tax on internet sales. The response was almost uniformly negative here, with one of the most popular proposed alternatives being the idea of letting the states deal with the issue themselves. I have to admit that the idea carried some appeal for me as well, at least at first glance. And it turns out that several states had already begun exploring precisely such a solution.
As you would expect, the internet retailers immediately got together and began challenging these new state taxes in court. The first two to make it to the top of the docket were in Colorado and Illinois. The results were pretty much the same. First up, Colorado.
A federal court has thrown out a 2010 Colorado law, which had already been temporarily blocked in federal court last year, meant to spur online retailers like Amazon to collect state sales tax. ‘I conclude that the veil provided by the words of the act and the regulations is too thin to support the conclusion that the act and the regulations regulate in-state and out-of-state retailers even-handedly,’ U.S. District Judge Robert Blackburn wrote in his opinion. The law and the rules to carry it out ‘impose an undue burden on interstate commerce’ and are unconstitutional, the judge wrote.
The story played out pretty much the same way in Illinois.
A Cook County Circuit judge ruled against the state of Illinois in its attempt to tax online sales from out-of-state companies.
Judge Robert Lopez Cepero today ruled that the 2011 law doesn’t pass muster because simply having an affiliated company in the state that makes sales or refers customers to an online retailer doesn’t create enough of a presence, or nexus, for tax purposes.
He also ruled that the Illinois law is unenforceable because of a federal Internet tax moratorium that runs through 2014.
So where do we go from here? If there is no constitutional path to allowing the individual states to collect sales tax, then it would seem that only two possible solutions remain. First, we could simply never have taxes on interstate sales. This is obviously a very popular answer, since nobody likes paying taxes and we all enjoy getting a good deal shopping over the internet. But the states are seeking ways to address a couple of very real problems. They need the revenue in many cases, but they are also trying to respond to the needs of brick and mortar stores who feel that they are being forced to fight on an uneven playing field.
Is a federal solution like the Marketplace Fairness Act the answer? It’s going to be a hard sell convincing conservatives that “more taxes” is ever the answer to anything, even if the money is supposed to be channeled to the states. But this situation needs to be settled sooner or later.