Tax Lawyer's Blog

We have written extensively about the efforts of states to tax Internet sales by using an economic rather than a physical presence test for nexus. See Related Posts at the end of this post.

Mike Godfrey of TaxNews.com reports that the Tax Foundation submitted a statement in support of a national physical presence test to the House Judiciary Subcommittee on Commercial and Administrative Law, which convened last week to discuss the topic “State Taxation: The Role of Congress in Defining Nexus.”

Here’s an exerpt of the Tax Foundation’s statement:

The Internet has seen an increased amount of commerce, but some seem to view it as a golden goose that can be squeezed without adverse effects on economic growth. It must be understood that the availability of many items in electronic commerce could be hindered if states are permitted to adopt economic nexus standards.

States will reach for as much revenue as they can, if they believe that it can benefit them even at the expense of other states and the nation as a whole. A uniform physical presence standard would restrain these efforts, maintain a level playing field for all types of businesses, and reduce costs and burdens to interstate commerce.

For example, if a New York company sells a product on its website to a California purchaser via servers in Ohio and Colorado, is the transaction everywhere, nowhere, or always somewhere at a given point in time?

A physical presence rule provides a logical answer to where the transaction is located, identical to the answer given for brick-and-mortar businesses: in this case, New York, where the company’s property and payroll are located. Proponents of economic nexus are mostly unanimous in rejecting that choice, but they would substitute only uncertainty about the ultimate answer.

It was not new for states to seek revenues by shifting tax burdens away from the majority of voting residents, such as with changing nexus rules.

Congressional action to adopt a physical presence standard may be the best vehicle for preventing burdens to interstate commerce, because it can be more comprehensive and accountable than judicial action and can also better address issues of transition, retroactivity, and de minimis exemptions.

The two most important statements in the Foundation’s testimony bear repeating:

1. “States will reach for as much revenue as they can”
2. “States [will] seek revenues by shifting tax burdens away from the majority of voting residents.”

Does anyone doubt that these two assertions are true?

The problem will grow as Internet commerce grows and states look for new sources of politically palatable revenue.

Congress must act and pass into a law a clearly defined national physical presence test that will preempt the states from establishing their own self-serving economic presence tests which would restrain interstate commerce and limit the growth of the national economy.

Related Posts:

• Sales and Use Taxes: Internet Sales Cost States Billions
• States Losing Money, Study Finds
• Supreme Court Refuses to Hear “Physical Presence Test” Case: Harbinger of Things to Come?
• E-Commerce Sales Tax Unworkable, Critics Charge
• State Governments are on the Prowl for New Sources of Revenue: Watch Out for New Internet Sales Tax Law

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