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Could Internet Sales Tax be a Good Policy?

In the past, online retailers were able to take advantage of a tax shelter that exempted them from sales taxes in states that they did not have a physical presence. Online retailers used this tax shelter to challenge entrenched incumbents and provide consumers with a bounty of new options. However, the tax shelter for online retail is being revoked. Looking at this more closely, it all seems pretty enlightened policy-making. Startups were given a leg up that increased competition and consumer choice, and once they succeeded, it was taken away. However, critics could argue that the tax shelter should have been taken away a decade ago. Keep in mind, Inc. started collecting sales taxes a year ago in anticipation of this internet tax shift.

Instead of letting the elected members of the Congress initiate the plan, it was done entirely by the people appointed by the president to decide legal disputes. Looking at previous cases, the U.S. Supreme Court held that mail-order retailers with no physical presence in a state shouldn’t have to collect sales taxes from customers in that state. The reasoning behind the other cases was that “state taxation falling on interstate commerce can only be justified as designed to make such commerce bear a fair share of the cost of the local government whose protection it enjoys.” This means that if a retailer had a store or even just a few employees in a state, it was deemed as enjoying the protection of the local government and thus obliged to collect sales taxes. Recently, the Supreme Court changed its mind, “modern e-commerce does not align analytically with a test that relies on the sort of physical presence defined in Quill. E-commerce has grown into a significant and vibrant part of our national economy against the backdrop of established rules, including the physical-presence rule. Any alterations to those rules with the potential to disrupt the development of such a critical segment of the economy should be undertaken by Congress.” The Supreme Court has basically done Congress’ job, thus crossing the line built between the two entities.

As the Supreme Court now becomes in charge of e-commerce policy making, it could create problems between Congress and the Supreme Court for other tasks going forward. Investors should be wary that Supreme Court tax shifting is not one of the biggest problems in the year but could lead to distortion in the future.

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