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Last week I addressed the legal history behind the collection of sales tax by online retailers who do not have a physical business in Nebraska. The recent U.S. Supreme Court decision in the case Wayfair vs. South Dakota negated the physical presence requirement that had been the constitutional precedent for over 25 years. The high court did not simply reverse its prior decision, but rather upheld the South Dakota law and laid out specific provisions that meet the constitutional test. Specifically, a state law should provide safe harbor for businesses that have only a few transactions in the state, nor should the collection of taxes occur retroactively.
Even more important, the Supreme Court specifically established a basis for streamlined tax collection and administration that does not present a burden to businesses, and therefore, interstate commerce. Included was access to sales tax collection software paid for by the state that, if used, provides the business immunity from audit liability.
The clarity provided by the ruling is critical to developing state policy that complies with the U.S. Constitution. I was firmly opposed to a proposed online sales tax collection bill in Nebraska during the past two sessions on the basis that we knew any law passed was not constitutional by current standards. The South Dakota case was making its way through the courts, and it was prudent to know with precision how the court would rule rather than pass laws based on speculation.
Citizens should also consider two other philosophical tenets of the proposed bill, principles which I had significant concerns about. First, the bill presented a serious threat to the personal privacy of consumers. Under current law, when you make a purchase and pay sales tax at the point of sale, there is no identifying information linked to that tax payment. The state cannot tell you how much sales tax you as an individual paid, nor what specific purchases you made upon which tax was due.
Under LB 44, online retailers would have been required to send the Department of Revenue a list of all transactions and the identifying information of the purchaser. In other words, state government would be collecting detailed reports of your online purchases that specifically identify you. Government possession of such detailed information about private taxpayer behavior is unprecedented. Such intrusion into your privacy should not be taken lightly.
The other argument I found interesting was the claim that not collecting sales tax at the point of sale creates a competitive disadvantage between brick and mortar and online retailers, thereby decimating main street businesses. This was a frequent assertion of many local officials and retail organizations. The argument ignored differences in the retail price of goods, business costs of local property taxes, as well as the influence of convenience on consumer behavior. However, if the 5.5% state sales tax truly does create a significant competitive disadvantage, retailers and local governments are asserting that sales taxes have a negative impact on consumer purchases.
This has two interesting implications. First, it would mean that cities that charge an optional sales tax are actively discouraging consumer purchases in their community. If their logic holds, it is counterproductive to local businesses for cities to raise their sales tax rates to generate additional spending. Shoppers will simply take their business to communities with a lower tax rate.
The second implication of the argument that paying sales tax negatively impacts consumer purchases applies to the continued movement to generate more tax revenue by increasing the number of goods and services on which sales tax must be paid. Small town retailers, especially grocers, are already faced with higher business costs compared to their large-chain counterparts in larger cities and low-overhead online retailers. Our rural communities should apply the same logic the chambers of commerce, local governments, and retail interests used to lobby for online sales tax collection. If their logic is true, expanding the sales tax base to increase government revenue could decimate rural and small town businesses that now must charge new sales taxes.
Finally, the online sales tax issue reveals an important philosophical perspective about taxes and governments. No matter how you wish to spin it, collection of online sales taxes at the point of sale means Nebraskans will have $30-40 million less in their pockets next year. When people say “the government is missing out on revenue”, they mean you are not keeping money to spend as you choose. It is my belief that money is yours. Nobody knows how best to spend it efficiently and effectively in a market economy than you, the person who earned it. Across state and local government, officials and special interest groups see the Supreme Court ruling as a revenue windfall. Despite all the legal arguments and special interest lobbying, you are still the one who pays the bill.