Ron Paul to Congress: Keep the Internet Tax-Free

Below is Campaign for Liberty Chairman Ron Paul’s testimony submitted to the House Committee on the Judiciary’s hearing on “Examining the Wayfair decision’s impact on small businesses and consumers.”

Dr. Paul explains why the Supreme Court was mistaken to rule in Wayfair that states could force out-of-state businesses to collect state sales taxes, and he explains why Congress can and should act to stop state legislatures and governors from taxing online commerce.

Statement of Ron Paul, Chairman of Campaign for Liberty

Congressional Hearing on “Examining the Wayfair Decision and Its Implications for Consumers and Small Businesses”

Committee on the Judiciary

July 24, 2018

Chairman Goodlatte, Ranking Member Nadler, and other members of the Judiciary Committee, I appreciate the opportunity to submit testimony on behalf of Campaign for Liberty’s hundreds of thousands of supporters on the impact of the Supreme Court decision in South Dakota v. Wayfair on consumers and small businesses. Campaign for Liberty is a grassroots issue advocacy and educational organization founded in 2008 to advance the principles of limited government, free-markets, individual liberty, and peace.

Campaign for Liberty’s grassroots activists have helped beat back numerous attempts to pass legislation allowing taxaholic governors and state legislatures to force out-of-state businesses to comply with the state sales tax laws. The misguided Wayfair decision has not lessened our opposition to legislation giving states new powers to make out-of-state-businesses comply with state sales tax (or other) laws. However, Campaign for Liberty recognizes that Congress must act to correct the Court’s mistake.

Before adjourning for the year, Congress should pass legislation reaffirming the Supreme Court’s 1992 Quill Corp. v. North Dakota decision which ruled states could only force businesses with a physical presence in their state to comply with state sales taxes, and simply selling goods via catalogs (or online) does not meet the physical presence test. The fact that since Quill was decided, the Internet revolution changed the way millions of Americans shop does not alter the constitutional principles Quill upheld any more than the fact that most Americans get their news online justifies new government regulations of the press.

Unless Congress passes legislation correcting the Court’s mistake in Wayfair, most Internet retailers will be forced to collect sales taxes on every purchase. An error in calculating sales taxes could cause a small retailer to undergo a costly and time-consuming audit, or even audits by multiple state governments. The compliance costs, along with the sales taxes themselves, will raise the cost of online commerce, burdening consumers and limiting the growth of Internet business.

Stifling the growth of smaller and new Internet retailers may be bad for consumers, but it serves the interest of large brick-and-mortar retailers, as well as large online retailers that already have to comply with state sales taxes because they have a physical presence in most states. These large businesses support giving states new taxing powers because they wish to use government power to make sure their smaller competitors stay small. Ironically, many of the big box retailers who have been most vocal about unfair competition from online retailers are themselves beneficiaries of corporate welfare.

Despite the claims of lobbyists for big corporations and crony capitalists, there is no evidence that the ability to shop tax-free is the reason so many Americans have embraced online shopping. The major attraction of online commerce is the convenience and wider selection. Many major retailers have stopped fearing competition from online commerce. Instead, they have integrated their online and brick-and-mortar businesses. More significantly, many small “mom-and-pop” stores have used the Internet to save their businesses. These small businesses would be most impacted if Congress fails to protect online commerce.

Some say small businesses were actually protected by SCOTUS’ Wayfair decision, in that they “limited” each state’s taxing power to businesses making “substantial” online sales within their state. But the question of what constitutes “substantial sales” is subjective. State legislatures are certain to set the “substantial sales” bar as low as possible. Small businesses whose sales in a given state are unreasonably defined as “substantial” can either pursue costly and potentially unsuccessful litigation, comply with the state tax laws, or cease doing business in those states.

Many other small businesses will purposely limit the amount of online sales they make to avoid doing “substantial” business in any one state. It is difficult to see how a policy that stops an Internet start-up from becoming the next Amazon helps make America great, prosperous, or free again.

Tax-and-spend, power-hungry politicians are unlikely to limit their new authority to force those they do not represent to comply with their tax laws solely to enhance sales tax revenue. Instead, they will try to use Wayfair as a justification for imposing other tax and regulatory burdens on out-of-state businesses. Having the power to tax and regulate employers and workers who cannot retaliate at the polls is a dream come true for many politicians. By making almost all online purchases subject to sales taxes, the decision will also reduce pressure on states to keep sales tax rates low. The result will be increases in sales taxes nationwide as states engage in a “race to the top” to increase sales taxes and other burdens on out-of-state businesses.

While I strongly defend states’ constitutional prerogatives under the Tenth Amendment, states do not have the authority to extend their reach beyond their own borders. The Commerce Clause was signed to allow Congress to ensure power-hungry state politicians did not impede interstate commerce by, for example, imposing taxes and regulations on out-of-state businesses. This is a rare case where Congress can and must use its Commerce Clause powers for the reason intended by the Constitution’s drafters: to stop states from impeding the free flow of goods and services across state lines.

In conclusion, I once again thank the Chairman and Ranking Member of the Judiciary Committee for the opportunity to submit this testimony, and on behalf of Campaign for Liberty’s supporters, I urge Congress to quickly pass legislation limiting the ability of state governments to tax Internet businesses outside of their borders.

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