States’ Internet Tax Scheme Could Lead to a National Sales Tax

The next time you order a sweater from a catalog business in Maine, or a computer online from South Dakota, you might see a little extra surprise on the bill: sales taxes!

That’s because state governments want to force businesses nationwide to start collecting sales taxes for them, even if that business has no presence in their state!

So, if a small business operating only in, say, Virginia and sells some widgets to someone in Florida, that small business will have to collect and report Florida sales taxes.

In the American Revolution, patriots fought for the principle of “No Taxation Without Representation.” Today, state governors are fighting for something called “The Streamlined Sales Tax Project” that turns our cherished principle on its head.

Up until now, the courts haven’t let states get away with this highway robbery. But the courts are weak on this issue, ignoring a strong Constitutional argument and principle that only Congress can regulate interstate trade. Instead, in 1992 the Supreme Court ruled only that it’s an “undue burden” to require businesses to keep track of the sale tax laws in the America’s 7,500 different sales tax jurisdictions. The courts never said that interstate sales taxes were inherently wrong.

That’s just the opening greedy state governments needed.

In 2000, they decided to get together to streamline and harmonize their sales tax codes. Even better, they could create an electronic system that managed all of the remaining complexity. Then, they could go back to the courts and say it was no longer an “undue burden” for small businesses to collect taxes for all 46 states with a sales tax.

Thus, the Streamlined Sales Tax Project (SSTP) was born. The states, moving with remarkable haste, managed to complete the project in November 2002. Now the fight is underway in a number of state capitols to get state legislatures to adopt the tax changes required to launch the SSTP and start collecting more money from you.

The outspoken and, unfortunately, effective leader in this project is Utah’s pro-sales tax Republican Governor, Mike Leavitt. It’s ironic that Utah, a conservative state with relatively low taxes, may well help saddle all Americans with higher taxes. Thanks, Gov.

On one hand, the SSTP offers the promise of simplifying sales taxes across America’s multiple tax jurisdictions. That’s a good thing for long-suffering retailers with multi-state operations. But the SSTP doesn’t want to streamline to help out business, or this project would have happened a long time ago. Quite simply, the reason for the Streamlined Sales Tax Project is that states want to take more of your money.

What About Congress?

In 1998, Congress passed the Internet Tax Freedom Act to cheers all around. This great law maintains a moratorium on new taxes on Internet access, which keeps your local County Commissioners from slapping taxes into your AOL or EarthLink bill every month the way they do your cable and phone bills.

The Internet Tax Freedom Act also prohibits taxes that discriminate against the Internet. That means if a state taxes a Mike Alstott jersey one way when it’s purchased from a regular store, it can’t charge higher taxes on you for purchasing the same jersey online.

The Internet Tax Freedom Act is an excellent law, and it’s up for renewal this fall (get ready for a fight in the Senate). But, the Internet Tax Freedom Act has nothing to do with the collection of Internet sales taxes.

That’s right. There are no federal laws prohibiting states from imposing sales taxes on online purchases from out of state. The only thing stopping the cross-country taxman is that single 1992 Supreme Court ruling that collecting such taxes is an “undue burden” for businesses.

The best we can hope for from Congress is that they’ll get annoyed because the SSTP is usurping their power. Despite the fact the modern courts seem to have lost their copy of the Constitution yet again, Congress will probably remember that regulating interstate is their responsibility. Maybe Congress will shoot down all of this nonsense. SSTP knows they face this risk, and that’s why they are cleverly calling for a vote in Congress, but only after they have the system up and running. They understand that, despite a compliant court, they’ll eventually need Congress to sign off on this whole scheme.

What About Corporate America?

Big business is often reliably anti-tax, but not when the issue is taxes on Internet sales. For example, the National Retail Federation surprisingly supports the collection of sales taxes on Internet retailers. The reason: The big retailers typically have a physical presence nationwide, so many already must collect sales taxes for online purchases. Plus, big retailers already have internal tax collection systems, so they don’t mind the additional burden. The big boys know that the difficult task of tracking all of these taxes will be tougher for their small, upstart competition.

What’s more, the SSTP was constructed with business politics in mind. The proposal has a nice little kick-back provision to give money to retailers to help offset the costs of tracking and collecting sales taxes. The project gives a cut of the gross revenue as cash rebate to the business collecting taxes. Again, there are probably some economies of scale for the bigger retailers, so over time this tax diversion will likely become a source of net income. It’s great when companies make a profit, but corporate cash flows should come from voluntary prices paid by willing consumers, not from government-imposed tax schemes.

There are other problems. Sales taxes are regressive, disproportionately hurting poorer consumers who spend most of their incomes. The SSTP must also track what you’re buying online, and will invariably lead to privacy abuses. Worst of all, over time, the system will become a de facto national sales tax. Maybe even the feds will start to want their cut. For all of these reasons, the SSTP should be stopped cold. But, having the right arguments rarely stops a government bent on spending your money. It’s going to take political action from outraged consumers.

It will be a tough battle to stop sales taxes on goods and services sold on the Internet. You can start by dropping the SSTP steering committee members a line and letting them know how much you oppose their efforts to raise taxes on hard-working American consumers. We’ve listed their contact information below. Thanks for listening, and be sure to let them know CSE sent you!


Hardt, (WI)
Peterson, (SD)




Marshall Stranburg, (FL)

Carol Fischer,
Charlotte Quarles, (KY)
R. Bruce Johnson, (UT)
Kim, (TX)
Harold Fox,
Tom Kimmett,