Jenny Beth’s Journal: What is the fate of our nation’s system of federalism?
The U.S. Supreme Court’s decision in South Dakota v. Wayfair on internet sales tax produces a level of uncertainty of where we stand with e-commerce, federalism and even the U.S. Constitution’s Commerce Clause. The Supreme Court upheld the state law requiring online companies that make over $100,000 in South Dakota or have over 200 transactions annually to pay an internet sales tax, even if those businesses don’t have a physical presence in the state. For the sake of our nation’s system of federalism, Congress needs to step in and make a decision that will protect small online businesses from more government taxation and regulation.
The Supreme Court’s disappointing ruling allowing states to compel out-of-state businesses to become their own tax collectors raises two significant challenges — the first is a practical challenge, while the second challenge is a much more serious question about the relevance of the Commerce Clause and federalism today.
On the practical side, there is the issue that small businesses are simply not equipped to deal with the 10,000 tax jurisdictions’ ever-evolving rules and regulations. Small businesses would be forced to ensure they remained in compliance and good standing with each tax jurisdiction where the business happens to have a customer.
The South Dakota law includes certain thresholds for small businesses, so upholding that law may protect small sellers from certain burdens — for now, at least. But, the ruling also creates uncertainty for these small businesses, which needs to be clarified. An online sales tax would leave these small businesses at the mercy of taxing authorities in other states, and make them subject to a complex web of taxing jurisdictions.
Such a needless burden would place small businesses at a further disadvantage compared to their larger competitors with in-house accounting teams and tax lawyers. And, not surprisingly, that is exactly why many giant online retailers have lobbied for the implementation of such an internet sales tax.
On the federalism question, South Dakota v. Wayfair reminds us of why our nation’s Founders saw fit to include the Commerce Clause in the Constitution in the first place.
Before the Constitution was written, as the colonies operated under the Articles of Confederation, the colonies mercilessly taxed out-of-state commerce and engaged in trade practices that benefited their own state, while damaging the other colonies’ economies. The Founders addressed that deficiency in the Articles of Confederation by establishing the Commerce Clause to grant to the federal government the exclusive authority to regulate and oversee interstate commerce.
Congress has the responsibility to act on this particular issue and make a decision that respects our nation’s system of federalism, the Commerce Clause and the small businesses that remain the backbone of this great nation.