by Mark Rhoads
On July 11, 1997, when I was Vice President of the U.S. Internet Council, I testified before the U.S. House Sucommittee on Telecommunications, Trade, and Consumer Protection on H.R. 1054 which was a moratorium on any new state taxes on internet sales until such time as the states could sort out the very complex federalism issues of taxing Internet commerce but they never did. My testimony is on page 47 of the hearing report.
With the signature of Gov. Pat Quinn yesterday on House Bill 3659, the so-called "Main Street Fairness Bill", Illinois now joins a small list of foolish states that are looking for a pot of gold where none exists. Worse, the new law doubles down on idiotic tax policy by producing no new revenue and chasing some affiliates of internet retailers from the state for no reason.
To start with, most sales of products over the internet are already taxed in the usual way if you know the location of the seller and the location of the buyer and a product is shipped into Illinois from some other state. Yet, the Illinois Department of Revenue has dutifully invented a figure of $153 to $170 million in "revenue" that Illinois supposedly loses every single year because of sales taxes that might in theory be imposed on transactions that take place via Internet commerce. It is a wholly fictitious number in my opion based on a "let's make a guess" methodology that assumes that dollar for dollar every single sale to any consumer who happens to have a credit card mailing address in Illinois would otherwise automatically happen in a "main street" bricks and mortar location. Lobbyists for national brick and mortar building retailers have also convinced themselves that this fiction is grounded in real world data and that Internet retailers have previously enjoyed some sort of unfair advantage over their stores in Illinois. They are fooling themselves but they believe it.
In my opinion, the more important target of the new tax has nothing to do with commerce taking place via Internet vendors, but rather mail-order catalog sales to customers in Illinois. The bill that Quinn has signed is a foolish attempt to reverse a 1992 decision by the U.S. Supreme Court in Quill Corp. v. North Dakota (91-0194) 504 U.S. 298 (1992) in which the Court ruled it was unconstitutional for North Dakota to try to mandate Quill Office Products of Delaware to collect the state sales tax on residents of that state because Quill had no actual stores located in the state and therefore he state did not have "nexus" or a connection between North Dakota and the company it was trying to force to collect its tax. The case had mostly to do with office products that North Dakota residents ordered from Quill by a means of a mail-order catalog since there was almost no sales commerce via the Internet in 1992. But by 1997 when I first testified on this topic before a Congressional subcommittee, national retailers such as Illinois-based Sears had already convinced themselves that Internet retailers were starting to pose a competititve threat to their stores because they never really thought the issue through. Not only will this new law not help Sears stores in Illinois, it could hurt Sears mail order business in other parts of the country if other states copy the Illinois folly.
Suppose for example that an Illnois resident decides to download a computer program, movie, game, or any digital product from an out of state or overseas vendor and use a credit card to make the payment. That transaction might or might not otherwise happen in a way that a customer walks into a store in Illinois to purchase a CD with the same data. Odds are strong that there is no main street equivalent sale. But there are many sales of digital products that only happen on the net and do not happen at all in so-called "main street" stores for a wide variety of practical reasons.
Quite apart from the constitutional problem of not having nexus with every out of state or overseas retailer who does business via the net with Illinois based customers, there are more practical problems to actually enforce this new law than I can list. The self-delusional staff at the Illinois Deparment of Revenue will soon discover that I am telling them the truth. To make this law work, they would theoretically have to be able to audit every online retail vendor anywhere on the planet to see if they ever transmit digits to an IP address located within the borders of the state of Illinois! It cannot be done. What if someone pays for digital products with a stored value card or digital cash and has no credit card or bank account mailing address in Illinois?
All of this crazy attempt to tax commerce over the net come from the inability of state policy makers in all states to understand that they cannot impose geographically defined sales taxes on commerce that by definition is not bound by georgraphy. Moreover, and they should not even try to because the nexus standard is a fair standard to begin with. Back in 1997, the Comptroller of Texas tried to impose a tax on every step in ecommerce just because some bytes and bits flew through servers located in Texas for a nano-second. He failed because the idea was unenforceable from the start.
If two friends, one from Illinois and one from New York, happen to meet in Cleveland for a lunch, they pay sales tax on the lunch at their restaurant becasue while they are sitting there they have nexus with Ohio. They may call the police or fire deparment for help even though neither lives in Cleveland because the resaurant and its customers have nexus and the restaurant benefits from the taxes it pays or collects for the state. But under current law, if there is no nexus, there is no right to tax parties just because the state is greedy for the revenue. The state provides no services to a retailer based in Sri Lanka who has popular games to sell to high school students in Illinois.
The bottom line is that main street stores are losing business to online digital stores not because the online stores have an unfair tax advantage, but because online vendors offer unique products that main street stores to not carry and maket those products in a far more efficient way. I will eat my hat if next year the Illinois Department of Revenue can prove it has collected even five million dollars more than this year because of this new lunatic law, let alone $153 million. The myth of "missing revenue" may have sounded like a plausible rationale for Gov. Quinn to sign the law, but what happens next year when the law does not produce any new revenue? Does Quinn then search for some way to tax the natives of some Pacific island because they once heard of Illnois or saw a movie made in Chicago? The state government of Illinois under both parties has become an uncontrollable spending beast that demands to be constantly fed and when the tax base disappears, the beast will be bankrupt. But Quinn is in denial and has convinced himself that no spending cuts are possible and most editorial pages in the state are in denial right with him because they choose to be. But reality will intrude itself sooner rather than later.