The Mind Boggles at Why Some Republicans Want an Internet Sales Tax

This op-ed was originally published at the Washington Examiner on March 13, 2018.

Congressional Republicans are in a strange place at the moment. Democrats wrongly criticize the landmark “Tax Cuts and Jobs Act” as a giveaway to corporate giants that largely ignores average Americans. Yet, rather than defending the pro-growth momentum carried forward by tax reform, some Republicans are promoting an Internet sales tax that plays right into this false Democratic narrative.

An Internet sales tax would benefit corporate giants like Amazon and Walmart, while effectively raising taxes on shoppers who frequent small businesses online.

Rep. Kristi Noem, R-S.D., is tirelessly championing her online tax increase to be added to the omnibus spending bill, convinced there are corners of America where “we need more taxes on the internet” would be an applause line with conservatives.

Even if some Americans and state government tax collectors, (legislators and public employee unions are certainly on that list) do want more online taxes, the current timing is odd. The Supreme Court is expected to hear oral arguments in mid-April in South Dakota v. Wayfair that will revisit a 1992 decision in which the court determined that it was unconstitutional for a state to collect sales and use tax from a business that does not have a physical presence in its borders. Passing federal legislation to allow states to collect Internet sales tax from sellers located in other states would preempt the Court and render the Wayfair case moot.

The Remote Transaction Parity Act, H.R. 2193, would essentially scrap the Court’s 1992 decision in Quill v. North Dakota, allowing spendthrift states hungry for more revenue to collect taxes from all online retailers that sell goods to consumers inside its borders. This may sound simple, but there are more than 12,000 taxing jurisdictions inside the U.S., each with its own regulations and rates. Large online retailers like Amazon would be able to absorb the cost, but this would create a tax compliance nightmare for smaller retailers as they grapple with the burden after a brief exemption period.

The bill provides a three-year window for online retailers to prepare to comply with the bill, which is strange considering that Noem and other apologists of this brand of the Internet sales tax claim it does not create a burden for smaller retailers. Online retailers with less than $10 million in gross annual receipts would be exempt in the first year. In the second year, the exemption is reduced to $5 million. By the third year, the exemption is $1 million. Beginning in the fourth year, there is no exemption.

Noem also claims smaller businesses would be given “free” software to help with tax compliance. Well, it won’t be free, as states (read: taxpayers) will have to pick up the tab for development of the software. Plus, what sane businessperson wants to hire a tax preparer that is paid by the government tax agency? Seriously, whose side will they be on? Your side, or the state tax agency paying their bill? Oh, and it’s not like the federal government and state governments have the best track record in this area. Does anyone else remember how well the Obamacare exchange websites functioned?

Passing the Remote Transaction Parity Act is a gift to rent-seeking special interest groups. Traditional brick-and-mortar retailers want an Internet sales tax because their business models are challenged by online innovation, and either haven’t evolved or can’t compete. Amazon wants it to push small competitors who do not have national distribution networks out of the marketplace.

Of course, state governments want the additional revenue. But as a recent coalition letter from conservative groups noted, the Government Accountability Office “estimated that 80 percent of this revenue is already collectible under current law.” (Emphasis in the original.) States have simply failed to enforce existing laws and are demanding Congress grant them more taxing power.

Finally, Republicans are playing with fire. Pushing a massive expansion of taxing power while also trying to sell the benefits of the Tax Cuts and Jobs Act will be quite a stretch, and few, save the most die-hard Republican loyalists, will buy it. Republicans will claim they acted to prevent the Supreme Court from reversing prior precedent in the Quill case, but no one has a crystal ball, and the court has shown itself to be unpredictable in the past.

According to a recent Rasmussen survey, 66 percent of Americans oppose an Internet sales tax. Only 21 percent support it. Clearly, if Republicans pass the Remote Transaction Parity Act, they are going to have some explaining to do.

The smarter play for Republicans would be to ignore the special interest groups walking them to the ledge and codify the Quill decision into law. It doesn’t appear leadership has even seriously considered this option. Codifying Quill would ensure the Internet remains free and open for innovation and competition, and send a signal to voters that Republicans aren’t going to bend to the demands of K Street.

Jason Pye (@pye) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is the director of public policy and legislative affairs for FreedomWorks.