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Tomorrow the House Judiciary Committee will hold the hearing “Exploring Alternative Solutions on the Internet Sales Tax Issue.” Taking some time to explore the Constitutional challenges of current proposals which mandate the collection of taxes by businesses across state lines and an examining the potential for the radical expansion of government would be a good place to focus.
Reportedly, Congressman Chaffetz is taking a harder look at the current Marketplace Fairness Act and working on language for new online sales tax legislation. Politico has reported that his “new measure would give more authority to states to decide how they implement sales tax collection from out-of-state online retailers…”
What would drive the Congressman to be this deeply involved in this issue? No doubt it is a laudable desire to make sure that government is not in growth mode by ignoring rights reserved to the states. “I believe it’s a states’ rights issue. I want to give them flexibility,” he said. “We haven’t hammered out actually what it would be, but there is a concern about small sellers and will they have to go through 34 different audits. There’s got to be a way to craft it so it is more reasonable and workable.” Unfortunately for the Congressman, there is no reasonable and workable scheme along these lines, particularly for a true conservative or constitutionalist, because neither the U.S. Constitution, nor the Bill of Rights, gave the states the right to trample their neighbors.
The heart of the problem is seeing the federal government act, the states being involved and reflexively concluding a state’s rights issue is in play when in fact it is not. In this case, the law that prevents states from taxing and auditing citizens of other states was an intentional limitation placed on the power of the states, a check on expansionist government.
There is little argument that the federal government has often been doing things that should never have been crammed into the Commerce Clause. But by no means is the Commerce Clause completely invalid. In fact, the very action of looting across state lines, taxing without representation, led to the need for something better than the Articles of Confederation. As a result, the U.S. Constitution was written to include the Commerce Clause exactly as a means to stop the overly aggressive states from interfering with interstate commerce, but did imbue states with the power to protect their citizens from other governments.
Since then, states have never had the power to tax out-of-state residents. The states have been specifically denied that power for good reason. What would happen if states had the power to tax out of jurisdiction residents as is being proposed?
The proposed legislation does more than just increase collected taxes on consumers, and even more than placing a significant compliance burden on online business, by its very nature it greatly expands government. It would mean the end of physical presence (the physical presence test is the test to determine the treatment of a person for taxation purposes and may rely on having a place of business in the jurisdiction) as a limitation on the ability to levy tax on a person, organization or corporation. In other words, such action leads to the end of any limitation on government power.
The issue of physical presence is perhaps the most important issue of the Internet age–does the power of government now spread beyond the physical borders of a government entity, such as a tax authority, or is the power of government now as limitless as the Internet so that any government anywhere can bring any person under its reach at any time? The question is fundamental. Under this scheme there is simply no remuneration against an overzealous taxing authority, or an overzealous authority pursuing any issue. Those who believe that government is a creation of the people, and hence should be limited must say yes to the requirement of a physical presence.
All other questions and “fixes” are irrelevant so long as this bedrock of the Constitution and fundamental tenant of conservatism is at risk. Thresholds for audits, software costs and ease of compliance, third party liability for reliance on software, burdens on small sellers and Main Street businesses, and a statute of limitations on state audits of remote sellers are all irrelevant if constitutional protections are forfeit. Once government is allowed to grow past the limitations of physical presence it will never again be limited.
Arguments over appropriate tax rates, and whether taxes are applied in the first place, are legitimate and worthwhile. A debate about whether constitutional limitations on the breadth of government, about whether an individual should be subject to governmental authority by those with whom they have no representation must always result in a firm “never!”
Are we going to have limited government in the 21st Century? What does the concept of limited government mean in an age where government is easy via the Internet and technology?
To their credit, Mr. Chaffetz and certainly Mr. Goodlatte have proven time and again that they are champions of the technology industry. Now they face a daunting challenge working within the Constitution and not creating a painfully effective vehicle for the radical growth of government power.
[Originally posted at Madery Bridge]