States should not buck com­merce rules

The Reporter (Lansdale, PA) - - OPINION - Ge­orge Will Colum­nist

South Dakota has be­come what South Carolina once was — stub­born, pug­na­cious and wrong. In 1860, South Carolina be­came the first state to vote to se­cede. In 2016, South Dakota’s leg­is­la­ture picked a fight in the hope that the U.S. Supreme Court would re­verse a prior de­ci­sion, thereby hand­ing the state a pol­icy vic­tory it failed to win in Congress.

South Dakota has en­acted a law con­tra­dict­ing a 26-year-old court de­ci­sion con­cern­ing in­ter­state com­merce, and a law Congress passed and ex­tended ten times. The state wants to tax pur­chases that are made on­line from ven­dors that have no phys­i­cal pres­ence in the state. South Dakota wants to in­crease its rev­enue and mol­lify its Main Street mer­chants. On Tues­day, the court will hear oral ar­gu­ments for and against South Dakota’s re­sponse to the great­est dis­rup­tion of re­tail­ing since the Sears, Roe­buck cat­a­log, more about which anon.

In 1992, in the in­ter­net’s in­fancy, the court held that re­tail­ers are re­quired to col­lect a state’s sales taxes only when the re­tail­ers have a “sub­stan­tial nexus” — ba­si­cally, a phys­i­cal, brick-and-mor­tar pres­ence — in the state where the item sold is pur­chased. Such a nexus would mean that the re­tailer ben­e­fits from, and should pay for, local gov­ern­ment ser­vices. Ab­sent such a nexus, how­ever, states’ tax­a­tion of sales would vi­o­late the Con­sti­tu­tion, which vests in Congress alone the power to im­pose such bur­dens on in­ter­state com­merce.

In­ter­net com­merce has bur­geoned partly be­cause many on­line re­tail­ers, by not col­lect­ing sales taxes, en­joy price ad­van­tages. This, how­ever, is less valu­able to them than their other ad­van­tages of con­ve­nience (no need to drive some­where to shop) and choices (al­most ev­ery­thing saleable is sold on­line). Such com­merce could not have flour­ished if ven­dors bore the bur­den of de­ci­pher­ing and com­ply­ing with the tax poli­cies of 12,000 state and local taxing ju­ris­dic­tions, with dif­fer­ent goods ex­empted from tax­a­tion. So, in 1998 Congress en­acted the In­ter­net Tax Free­dom Act (it was made per­ma­nent in 2016). This ex­presses Congress’ pol­icy choice to pro­hibit state and local gov­ern­ments from im­pos­ing unique tax rules for In­ter­net trans­ac­tions.

The ITFA, an ex­er­cise of Congress’ enu­mer­ated power to reg­u­late in­ter­state com­merce, is in­tended to shield small in­ter­net sellers from dis­crim­i­na­tory taxes and com­pli­ance bur­dens. (Ama­zon pays sales taxes in all the 45 states that have them.) In 1998, the ITFA passed the House by unan­i­mous con­sent and the Se­nate 96-2. For rev­enue rea­sons, only four gov­er­nors en­dorsed it. Now South Dakota is seek­ing the court’s per­mis­sion for its ex­trater­ri­to­rial grasp­ing. It wants the court to over­rule this con­gres­sional pol­icy cal­cu­la­tion: The so­cial ben­e­fits of dy­namic in­ter­net com­merce, with small com­pa­nies en­abled to com­pete with large ones, ex­ceed the costs to tra­di­tional re­tail­ers, such as Sears, which once upon a time was a prob­lem for then-tra­di­tional re­tail­ers.

Late in the 19th cen­tury, the Sears, Roe­buck cat­a­log was a re­tail­ing re­sponse to what gov­ern­ment had di­rectly (the Homestead Act) and in­di­rectly (gov­ern­ment-sub­si­dized rail­roads) cre­ated — vast, thinly pop­u­lated swaths of ru­ral Amer­ica where farm fam­i­lies had few if any shop­ping op­por­tu­ni­ties. By 1898, the cat­a­log had 583 pages. In 1907, when the nation’s pop­u­la­tion was 87 mil­lion, Sears mailed out 3 mil­lion cat­a­log. In 1927, the nation of 119 mil­lion re­ceived 75 mil­lion Sears cat­a­logs and other mail­ings, helped by another gov­ern­ment pro­gram — ru­ral free de­liv­ery. Some tra­di­tional down­town re­tail­ers were an­noyed, not for the last time: Wal­mart and other “big box” stores were com­ing to the edge of town.

South Dakota’s im­per­ti­nent law re­flects this fact: Gov­ern­ments of­ten are re­flex­ively re­ac­tionary when new tech­nolo­gies dis­com­fort es­tab­lished in­ter­ests with which the po­lit­i­cal class has com­fort­able re­la­tions of mu­tual sup­port. The state’s sales tax rev­enues have grown faster than the state’s econ­omy even as in­ter­net re­tail­ing has grown. Its brick-and-mor­tar re­tail­ing sur­vived Sears, Roe­buck, and then sur­vived Wal­mart (of­ten bet­ter than Sears, Roe­buck has). In­deed, many brick-and­mor­tar re­tail­ers are now brick­sand-clicks en­ter­prises, of­fer­ing on­line shop­ping.

Tra­di­tional re­tail­ing will, like Wal­mart (which is now be­ing chal­lenged by Ama­zon), pros­per or not de­pend­ing on mar­ket forces, mean­ing Amer­i­cans’ pref­er­ences. State gov­ern­ments should not try to pre­vent this whole­some churn­ing from go­ing where it will.

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