BOSTON — Gov. Charlie Baker wants Massachusetts to join a handful of other states in a doomed effort to pass an extraterritorial taxing scheme that the U.S. Supreme Court has already declared unconstitutional. Even in the best case scenario that Baker's internet sales tax proposal survives a costly court challenge, it would mean rendering meaningless the U.S. Constitution's Commerce Clause, which makes clear that taxing authority should be well-defined and limited by state borders.
When Baker filed his version of the commonwealth's spending bill in January, he proposed to begin collecting a sales tax (6.25 percent) from online retailers that do more than $500,000 in sales and 100 transactions annually in the Bay States. Massachusetts Department of Revenue (DOR) officials estimated the measure would send $30 million into state coffers to help balance the FY 2018 budget.
Baker's original strategy involved an attempt to broaden the definition of what constitutes a "physical presence" in the state to include internet "cookies." The DOR's argument was that, as retailers increasingly use the internet to reach consumers, internet cookies — that is, data files stored on a computer by a web browser — constitute tangible personal property. Simply put, the proposal suggests that, wherever cookies are present, internet vendors have established a physical presence in the state, even if they have no building, office or staff on the ground.
This drew immediate criticism from trade and retail associations. NetChoice — a national trade association representing e-commerce sites — joined forces in a lawsuit to challenge the proposal with the American Catalog Mailers Association, a trade association representing the interests of companies, individuals and organizations engaged in and supporting catalog marketing. Together, the groups argued the DOR's interpretation "violates Supreme Court precedent and the Internet Tax Freedom Act, a law Congress enacted to stop states from imposing taxes that discriminate against the internet." They contend that the U.S. Supreme Court's 1992 decision in Quill v. North Dakota addressed the obligations of mail-order businesses to collect sales tax on out-of-state sales and, in doing so, established both a legal definition of physical presence and a binding legal precedent.
Refile if necessary
Then-DOR Commissioner Michael Heffernan ultimately rescinded the directive before the Suffolk County Superior Court had an opportunity to make its ruling in the suit. Even so, the state has not abandoned its effort to impose an internet sales tax. While the DOR granted a stay of taxation, the Baker administration has already announced that it plans to revisit the proposal in the fall. NetChoice Executive Director Steve DelBianco has warned that his association will not hesitate to refile the lawsuit if the administration moves forward with a similar regulation.
Though states pushing to collect sales taxes from companies that have no physical presence in those states is a fairly recent development, it's becoming commonplace thanks to perpetual state budget deficits and a lack of policy consensus in Congress. While e-commerce giant Amazon now collects sales taxes on purchases nationwide, if the DOR does decide to enforce the directive, Massachusetts would join a handful of states with internet sales tax regulations in place. In April, Massachusetts' two U.S. senators — Ed Markey and Elizabeth Warren — co-sponsored the Marketplace Fairness Act, legislation that would allow states to collect sales tax from online retailers.
Massachusetts, sometimes derided as "Taxachusetts," has a longstanding tradition of proposing new taxes and raising existing ones to boost revenue. Recent examples include a 2013 measure to tie the state's gas tax to inflation (repealed by a 2014 ballot initiative), and a tobacco excise tax that, in 2013, jumped from $2.51 per pack to $3.51 per pack. At the time, this made it the second-highest cigarette tax in the country after New York.
It's time to take a turn toward fiscal responsibility, which does not mean finding unconstitutional and impractical ways to bail out the state's budget. While people like Bill Rennie of the Retailers Association of Massachusetts (RAM) view the internet sales tax as a way to level the playing field for brick-and-mortar business, it's little more than robbing Peter to pay Paul. Massachusetts should want no part in the costly, lengthy legal battles that will ensue across the country to challenge what is already settled law.
Nicholas John is Northeast region manager for the R Street Institute.