When people talk about Internet success stories, they are likely to bring up Google, Amazon, Netflix, or any number of social media companies. But none of these stories explain how the Internet changed the world.
The Internet’s most transformative feature was not that it produced giants with brands that are household names, but that it gave small entrepreneurs, and even people who may never have started businesses otherwise, unprecedented access to national or even world markets that previously had been available only to much bigger companies.
It’s true that the Internet posed a threat to the business models of some traditional retailers such as Borders and Blockbuster, Toys ‘R’ Us, or any of the extinct smaller businesses that once dealt in books or videos or music.
But that’s only one side of the story. For most small businesses, the Internet was a boon. Rather than decline, annual business formation increased by 25 percent in the first decade of Internet access. That’s because tiny cottage industries could sell their handcrafted products into national markets. Local suppliers could for the first time compete nationally. Thanks to the Internet, diners miles away could discover a mom-and-pop Vietnamese restaurant and review its menu on their phones.
People can also now do business on their own terms, selling services to others they’ll never meet. The stay-at-home mom who lives down the street from you might well be running a tax-preparation or audio-transcription business from her den while her children are at school.
All this brings us to Thursday’s Supreme Court decision on Internet taxes, which put the ventures of all these new entrepreneurs in danger, however sound the ruling may have been on the law. Only Congress can save them now from drowning in a paperwork flood that money-hungry state and local governments will be directing their way.
In South Dakota v. Wayfair, an ideologically mixed group of justices, including Clarence Thomas, Neil Gorsuch, and Ruth Bader Ginsburg, struck down the longstanding legal precedent that businesses don’t have to collect sales taxes on behalf of states where they have no physical presence.
If the decision is correct on the law, it must be taken as a signal that the law must change. Otherwise, it would mean that the stay-at-home mom mentioned above could no longer do business unless she is willing to keep records and make regular tax payments, even if the amounts are trifling, to as many as 9,998 different state and local sales tax jurisdictions that each have their own forms and tax rates. If that doesn’t already sound complex enough, the various jurisdictions don’t even agree on what gets taxed. Artisans selling their goods through Etsy will now have to learn which states charge tax on shipping and gift-wrapping costs, because the rules are different everywhere.
In the specific case before the court, South Dakota’s tax rules are not as terrible as they could be — the state won’t come after out-of-state retailers with less than $100,000 in sales in the state. But that is still a fairly low threshold, and there’s no guarantee that other states and jurisdictions will be even that reasonable.
Amazon, Netflix, and their ilk might survive such a bureaucratic nightmare. A corporate functionary might be able to handle the possibility of having his company audited by any of hundreds of different states and cities he’s never even visited. But no small businessman could do it. It would oblige businesses to evade taxes, limit where they sell their goods or services, or just go out of business altogether.
“Congress may legislate to address these problems if it deems it necessary and fit to do so,” Justice Anthony Kennedy wrote in his Wayfair opinion. Now that Wayfair is the law, Congress must do just that, as it has done previously in limiting the collection of certain state taxes.
Using its power to regulate interstate commerce, Congress can create a new standard, or restore the old one, in black-and-white, replacing a less-certain judicial creation, and prevent state governments from burying the national market under a landslide of tax paperwork.
