Last month, the Supreme Court heard oral arguments in the landmark tax case South Dakota v. Wayfair. South Dakota recently passed a law that requires Internet sellers to collect sales tax when selling to South Dakota residents. This law directly challenges the precedent established in Quill Corp v. North Dakota (1992), which held that a company could not be forced to comply with a state’s sales tax collection and remittance requirements unless it had a physical presence in the state. If decided in South Dakota’s favor, a reversal of the Quill precedent will result in Internet sellers around the country being subject to the thousands of different state and local tax codes in the U.S.
Across the Atlantic in Brussels, the European Union is seeking to implement a digital tax on tech companies that operate within EU borders. This directive from the European Commission, the EU’s executive branch, would establish a 3 percent tax on digital revenues of major tech firms, irrespective of where these revenues are generated. If a company that is based in Luxembourg has an ad that is viewed by a user in France, the French tax administration would be able to collect tax on the company’s revenues.
These approaches by South Dakota and the EU violate longstanding principles of tax policy, and highlight the growing problem of governments seeking to expand their taxing power. Tax codes must be simple to understand and easy to comply with. If not, economies run the risk of having resources that could otherwise be used for production being wasted on complying with an over-burdensome tax code.
In the United States, there are more than 12,000 tax jurisdictions due to combinations of state and local taxes. Not only can each of these jurisdictions have different rates, but they also can have different sales tax bases, defining what is and what is not taxable in their own way. This creates an enormous burden for Internet sellers, as they must spend the time and resources to be able to comply with each tax code where one of their customers are located.
In the EU, the distortion is even clearer. The EU’s 28 member-states each have their own corporate tax codes and rates which apply domestically. When a company establishes its headquarters, it does so whilst keeping tax liabilities in mind. This is a hallmark of a free market system, allowing countries to compete with their tax codes in order to attract businesses and investment. An EU-wide tax on turnover decreases the ability of countries to compete for business using their tax code, eroding the power of the free market and the principle of state sovereignty. To make matters worse, the majority of companies that would be affected under the EU proposal are American companies.
Aside from their economic distortions, the taxes imposed by South Dakota and the European Union are also politically reprehensible. These proposals allow politicians unaccountable to the people being taxed to create and enforce tax laws.
In the South Dakota case, a reversal of Quill would allow tax-hungry states such as California to impose sales tax collection requirements on businesses and consumers in other states. These taxpayers have no ability to voice their concerns and views at the ballot box.
In the EU, this robbery of a voice in tax decisions comes from the European Commission imposing a digital tax on the Union as a whole. Such implementation would rob low tax states such as Ireland the ability to keep their low tax systems, at the expense of subsidizing poorly managed large spenders such as Germany and France.
South Dakota and Brussels are on the opposite sides of the globe, but are currently seeking to operate in the same sphere of tax policy. Activists should continue the fight against these over-extensions of tax powers in the U.S., EU, and worldwide. Instead of extending the government’s hand, decisions should be left to the voters of the respective constituencies to have the final say over the policy. Once bureaucrats receive the right to more of your tax dollars, it will be hard to get it back.
Kevin Adams is federal affairs associate at Americans for Tax Reform.
