The Tenth Amendment provides that any authority not expressly delegated to the federal government by the Constitution remains with the states. Much of the strength of our federal system lies in the resultant diversity of our states.
That dichotomy has been eroded over time as the federal government—the Executive Branch, the Congress, and the Supreme Court—has limited states authority even while relying on state and local governments to implement national policies.
At the same time, technological advances have made it easier to traverse the country physically and electronically, creating new challenges to state sovereignty.
However, in our e-commerce world where physical boundaries are transcended, Congress has the opportunity to work with states to reverse a Supreme Court decision and repair one of the most basic tenets of state sovereignty: the ability of a state to develop and manage its fiscal system.
Specifically, in a world in which buying a pair of pants can be done at either the corner store or on the Internet, it is time for Congress to allow states to collect sales taxes on all sales into a state. The passage of the Marketplace Fairness Act will allow states to level the playing field between Main Street retailers and online sellers, improve revenue collections and increase competition for consumers.
Annually, states fail to collect more than $20 billion from transactions conducted over the Internet or through catalogues. Although the tax is owed, states cannot compel sellers, who do not have a physical presence in the state, to collect the sales tax without federal legislation. The explosive growth of electronic commerce—more than 10 percent annually even during the recession—means states’ existing sales tax bases are eroding, increasing states’ reliance on other revenue streams.
In our federalist government, states must be allowed to control their tax systems. However, it is noteworthy that in Quill v. North Dakota, the Supreme Court said only Congress can give the states the authority they need to require collection from out-of-state vendors selling into their states.
Much of this 1992 decision was based on catalog sales and the apparent complexity of collecting sales taxes in 50 states. In recent weeks, the opposition has focused on the supposed complexity of collecting taxes on Internet sales, saying it creates a burden for small businesses. Six companies currently manufacture software that automates collecting remote sales tax. Software like this will be supplied by states to businesses at no cost.
Opponents of Marketplace Fairness also will say that this is a tax increase. Not true—it is a means of collecting taxes already owed by consumers. Nor is it a tax on the Internet or on business.
From the states’ point of view, if a company is crossing state boundaries, whether physically or electronically – doing business, selling goods and soliciting customers in their state – that company should have to play by the local rules. If a state has a sales tax, then everybody selling goods in that state should have to collect and remit it. This philosophy is not only fair, it also promotes competition, which is good for consumers; helps with collections, which keep other taxes down and help pay for essential services; and levels the playing field for business.
For business, this legislation means that the corner store is on the same footing with the online retailer. In other words, the online merchant has the same requirement to collect sales taxes as the local sporting goods store that employs our neighbors and sponsors the little league team. In a 21st century economy, it does not make sense to play by 1950s rules. A sale no longer requires a storefront or a handshake. The Internet has spurred our economy and increased choice, but it doesn’t need a subsidy—it needs to follow the rules like everyone else.
The Marketplace Fairness Act, which passed the Senate with overwhelming bipartisan numbers, seeks to enhance federalism, improve fairness in state sales taxes, keep jobs in our communities, and reverse the erosion of a traditional state tax base. It is common-sense legislation that Congress can and should pass this year.
Dan Crippen is the executive director of the National Governors Association (NGA).