The Thin Thread Protecting Us From Taxation Without Representation

Grover Norquist President, Americans for Tax Reform
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Second Amendment supporters often cite the Second Amendment as our “First Freedom,” and they’re right: the right to bear arms helped secure what might be called informally our “Second Freedom,” won in the Revolution, freedom from taxation without representation.

While the most obvious check on taxation without representation is our republican form of government, a critical check has also been established in states through the concept of “physical nexus,” that a person or business has to have some kind of physical presence within a state in order to be subject to the taxation authority of a state. California, for example, cannot just impose a business income tax on Florida businesses. Makes sense.

When it comes to remote purchases, like online or over the phone, the operating precedent has been the Supreme Court’s Quill v. North Dakota decision that stopped North Dakota from establishing the Quill Corporation’s physical presence based on software and the solicitation of orders. In effect the decision has meant that states can’t make businesses in other states collect sales taxes for them. This constitutional protection is referred to by the spending interests as a “loophole.”

Disturbingly, this protection hangs by a thread. Supreme Court Justice Anthony Kennedy wrote in a concurring opinion in Direct Marketing Assn. v. Brohl just last week that Quill is “tenuous” and is “inflicting extreme harm and unfairness on the States.” It is clear from his opinion in that he’d be willing to throw out the protections taxpayers have had since Quill.

Direct Marketing Assn. v. Brohl itself was a victory: the Court unanimously ruled against a 2010 Colorado law that required out-of-state retailers to send in Colorado customers’ names, addresses, and the amount of goods they purchased during the previous year. But given Kennedy’s own statements about Quill and his swing position on the court, small businesses that operate online are deeply concerned.

And the court itself isn’t the only problem; the protections of Quill could be lost through simple federal legislation too.  Perhaps Kennedy’s support of increasing the power of the more than 9,000 tax collection authorities in the U.S. is what encouraged Senators Dick Durbin (D- Ill.) and Mike Enzi (R-Wyo.) to reintroduce legislation yesterday that empowers taxing jurisdictions to force businesses outside their borders to collect taxes — subject to fines, lawsuits, audits and the full power of every hamlet, county and burg from sea to shining sea, without recourse to any constituent services from any elected representative.

This legislation has the ironic name of “Marketplace Fairness Act.” Unfortunately it enjoys bipartisan support. Last Congress it passed the Senate handily, though House Republicans had voting priorities other than tax increases.

To be fair, some of the proponents of the Marketplace Fairness Act have a point about how the same purchases are treated differently depending on how they occur and with whom. To be worth considering, however, any reform would have to preserve the physical nexus standard, protect businesses from audits and harassment from other jurisdictions, and hold taxpayers harmless overall. This is a test the Marketplace Fairness Act dramatically fails on all counts.

Meanwhile, at the state level, the Colorado case illustrates states’ attempts to claw themselves out of the box of only being able to tax and regulate their own citizens. States have been pushing to redefine what “physical” actually means in order to expand their tax base beyond their own physical borders. Many states are passing legislation that says digital advertising or a certain amount of sales a business has in a state constitutes “physical” presence. Thankfully, so far the courts have kept them in check to a large degree.

But taxpayers should be worried. Big city mayors, lawmakers and governors want the money; that’s no surprise. But their focus on destroying Quill and physical nexus isn’t really about the immediate money to be collected from sales taxes online. It’s about the erosion of the freedom from taxation without representation, and paving the way for politicians to achieve the holy grail of tax collection: taxing people who can’t vote against them or leave.

The spending interests and their allies in big businesses (who already have physical presence in every state) are desperate to punch a hole in the physical presence standard in Congress, in the statehouse, or in the courts. Taxpayers need to make sure they fail.

Grover Norquist is president of Americans for Tax Reform and the author of the forthcoming book, End The IRS Before It Ends Us  How to Restore a Low Tax, High Growth, Wealthy America.