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Taxation without representation, online edition

The Senate passed the Marketplace Fairness Act by a 69-27 vote on Monday, bringing us one step closer to state taxes on Internet commerce.  The House has its own version of the bill, so there’s a pretty good chance it will reach the President’s desk, and of course you had Barack Obama at “new tax.”  It will be a wonder if he can keep from trembling visibly with excitement when he signs the law.  Republicans, on the other hand, might have a spot of trouble explaining their enthusiasm for a new tax to constituents.

Thus passes the concept of resistance to “taxation without representation,” which was a really big deal in the early days of American independence.  Web companies will soon be audited by thousands of state and local authorities in which they have absolutely no political representation, and from whose governments they receive no direct services.  The requirement for a taxation “nexus” – the ownership of property in the state levying sales taxes – was not some weird, arbitrary legalism.  It was based on a principle held very dear by the Founders.  Then again, so were all the other rights that have lately been treated like arbitrary legalisms, such as the right to refuse to pay for other peoples’ birth control, the right not to buy products from officially favored insurance providers, and the right to keep and bear arms.

Internet sales taxes won’t be the first injury done to the principle of “no taxation without representation,” mind you.  Among other things, we’re also learning a long and painful lesson in the dangers of offering representation without taxation.

Did you know the British crown and its loyalists had an answer to the revolutionaries’ famous complaint about taxation without representation?  Learning of the Revolution in school, you might have thought it was a total “checkmate” moment for the King, who vented his intellectual frustration like Humphrey Bogart slapping Elisha Cook around in The Maltese Falcon: “When you’re taxed without representation, you’ll take it, and like it!”

But no, the counter-argument was that the colonials enjoyed “virtual representation” in Parliament.  Basically, this was the idea that every member of Parliament represented every subject of the British Empire.  There was no practical way for the colonists to elect their own representatives and ship them off to London.  How would they communicate in a timely manner with their constituents?  The British thought their rebellious colonists were absurdly unreasonable to reject virtual representation and the taxing authority of the distant King and Parliament.  They looked upon the rebel cries of “taxation without representation” almost exactly the same way Washington grandees look down their noses at the people who object to Internet sales taxes.

The practical objections to virtual representation are gone now.  If we were still subjects of the British Empire, we’d have no trouble bundling representatives off to Heathrow Airport and using cell phones to tell them what their constituents expect.  But if any echo of the Founders’ independent fire remained in us, we still wouldn’t find the arrangement acceptable.

Obviously, we don’t think of the relationship between state governments the way we would view an independent nation breaking away from an overseas empire, and dissolving the political bonds which have connected them with one another, because it has become necessary in the course of human events.  We’re all Americans, from one state capitol to another.  And yet… there remains something to be said against small business owners with influence in only one state government – the state where they reside, and vote – facing auditors from most of the other forty-nine states, pressing them into compliance with thousands of state and municipal tax codes.  Keep in mind that even compliance with the tax rates of the 45 states which collect sales tax requires a lot more than keeping track of 45 tax rates, and the sales each would apply to.  Some of these states have complicated rules about how different goods are taxed, under various situations.

This represents a huge burden for smaller companies.  At present, only the smallest operations – those with less than $1 million in annual sales – would be exempt from this burden.  A million dollars in sales really isn’t all that much.  Compliance costs, coupled with reduced sales from the sudden requirement to add tax, could easily eat up the profits of businesses that don’t far exceed a million dollars in sales.  It’s the most clear and devastating incentive against growth since ObamaCare: a hard-coded line of doom that only the most foolhardy online entrepreneur dares cross.  ”Red lines” against Syrian chemical weapons may not mean much, but every small business owner can clearly see the “red lines” of a policy like ObamaCare or Internet sales taxes, and they will back away.  Perhaps they’ll begin by refusing to do businesses in the states with the most complex tax laws and aggressive auditors.  Won’t that be lovely for the people who live in those states?  They’ll soon learn not to waste time shopping online with small specialty operations, who can’t afford to have them as customers.

What benefit does a Georgia company with $1.2 million in annual sales see from the government of Illinois, which a $900,000 company does not?  What could either of them do to affect the death-spiral fiscal policies of Illinois?  And you just know that million-dollar sales limit will be lowered across time, because state governments will remain hungry for revenue, and it won’t seem “fair” to exempt the $900,000 operation from a burden the $1.2 million company must bear.  Like every other tax – all the way back to the original income tax – the Internet sales tax will be sold as a levy against the mighty, but it will soon apply to the modest as well.

Mail order has been around for a long time, but the Internet took it to a whole new level.  A vibrant new industry with delightfully low barriers to entry and success is about to be crushed, because the old notion of linking taxation to representation has become a dusty antique from a bygone era.  Instead, online entrepreneurs will be held accountable by distant governments they’ll never get a chance to vote against.  The digital highway of online commerce leads right back to 1776.

 

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