Is the internet sales tax bill unconstitutional?

by Angela Chagnon

A bill that would tax internet sales passed the House Thursday afternoon and was referred to the Senate Finance Committee. H.143 was introduced by Jeff Wilson (D-Manchester) and modeled after New York’s 2008 internet sales tax law, would require internet-based companies to collect and remit sales tax as if they had a physical brick-and-mortar presence in the state.

Amazon.com has threatened to pull its more than 1,000 affiliates out of Vermont should the bill become law. This is not an empty threat, as the online retailer has ended its affiliates program in Rhode Island, Colorado, and now Illinois when those states passed similar tax bills. Amazon also plans to pull its distribution center out of Texas due to what it calls an “unfavorable regulatory climate.”)

In a letter to its 9,000 affiliates in Illinois, Amazon called the sales tax law “unconstitutional and counterproductive.” The letter goes on to say:

“[The law] was supported by national retailing chains, most of which are based outside Illinois, that seek to harm the affiliate advertising programs of their competitors. Similar legislation in other states has led to job and income losses, and little, if any, new tax revenue. We deeply regret that its enactment forces this action.”

Don Mayer, the CEO of Small Dog Electronics in Williston, is firmly opposed to the internet sales tax. In response to an article posted on Vt Digger, Mayer writes:

If the well-established internet merchants are forced to collect sales tax for other states, the administrative burden is significant (collecting taxes for over 8000 states and counties and cities), job loss is inevitable and the potential for expansion of Vermont-based internet merchants will be limited. It is a bad idea.

It is also a tax increase to every day hard working Vermonters who now are able to purchase goods tax-free in some cases. Of course, they are obligated to pay use tax, however, you and I both know that is seldom paid.

I believe the internet sales tax will depress a growing sector of the Vermont economy, will result in job losses and expands a regressive tax.

Mayer has a valid point. Colorado’s internet sales tax law passed in 2010 had a devastating effect on the state, according to a Human Events article:

Colorado Democrats predicted that revoking what they described as the Internet sales-tax exemption would bring an additional $5 million to the state’s depleted coffers. Instead, it appears the Democrat-controlled legislature has killed an entire industry at the cost of as many as 10,000 jobs.

However, a recent development may reverse that mistake. Colorado’s law was declared unconstitutional by a Federal court in January 2011, and the state legislature is in the process of repealing the tax law.

“The court buttressed its ruling by citing to long-standing decisions by the U.S. Supreme Court supporting the principal that a state may not impose on out-of-state retailers burdens not imposed similarly on in state retailers. Citing these decisions, the court observed that “out-of-state retailers that do not have a physical presence in Colorado generally are not obligated to collect and remit sales tax on their sales in Colorado

The landmark U.S. Supreme Court case for this issue is Quill Corporation vs. North Dakota (1992) which reversed the North Dakota Supreme Court’s earlier decision regarding the use tax. Although Quill Corporation was a mail-order catalog company, the same principles apply to internet companies.

It would be wise for Vermont legislators to avail themselves of this information before voting on a law that may end up costing the state a lot of time, money, jobs, and a potential expensive lawsuit.