Streamline Sales Tax is on the rise and is still illegal

Originally printed on November 30, 2005

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Legal Theft

Yesterday afternoon, I was traveling back from a visit to the north Jackson hospice where Sally’s aunt is staying when (and this is a rare thing) I tuned into my good friend  George B. in the afternoon. Now George is a smart man both based on his Doctor of Education degree in Educational Leadership from Union University, and he has augmented that with a 1992 “Leadership Jackson” degree but his wit as well.

But his education, his experience in business, and his career in education has all but excluded an education on the Constitution of the United States or even the Tennessee State Constitution. So the man, whom I admire, who declared himself the keeper of the torch, the protector of freedoms, the voice of reason for WNWS, knows nothing about the free enterprise system or the legal transfer of goods from state to state. George’s view to simply require each state to make internet businesses collect sales tax on goods sold out of state is unconstitutional because of it’s violation of the interstate commerce clause. But that didn’t matter today to George because the Constitution is simply a living document that may be read in any fashion known to man.

So here is the truth

The Supreme Court’s 1992 Quill decision currently disallows states from enforcing their sales taxes on merchants that sell into the state but do not have a physical presence or “nexus” there. However, the court left the door open to Congress requiring such a tax. The states voting for the “Streamlined Sales Tax Project” proposal hope that, if enough states sign on to the agreement, Congress will rewrite the law and mandate such taxation across state lines.

The act was passed in Tennessee while most people were paying attention to the ongoing income tax debate – hence, it got little or no press coverage. But by passing that act, Gov. Sundquist set the state for higher taxes across Tennessee in any city or county where the local option sales tax is below the capped maximum of 2.75 percent. That’s another part of the sorry Sundquist legacy. Bredesen, of course, is not one to let go of what he thinks is one good idea.

Of course the state of Tennessee’s issue of it’s amnesty program is not news but an attempt to sign on those that have not agreed to this unconstitutional act on state theft. The program the state has enlisted in is called the Streamlines Sales Tax Project.

The news report released by the state of Tennessee say states lost $2.8 billion last year in uncollected Internet sales taxes, which is much less than previously estimated, according to a new study released this week. The study, by the Direct Marketing Association, contradicts and criticizes a series of University of Tennessee studies that had predicted much higher losses of sales tax revenue due to e-commerce. Those UT studies confused different types of online transactions and relied on fuzzy numbers and wildly-exaggerated estimates to arrive at its inflated figure.

The amount of potential revenue that cash-strapped states are missing out on has been grossly overstated, says Peter Johnson, a DMA economist. “The Internet is not creating a massive leak in state coffers.”

The DMA report estimates the states will miss out on $4.5 billion in tax revenue in 2011. The University of Tennessee economists had previously estimated that states will lose $54 billion. That’s a difference of nearly $50 billion.

Why is UT’s much-higher – and much-hyped – estimate wrong? UT’s studies used sales estimates compiled by Forrester Research at the height of the dot-com bubble, while the DMA used actual sales figures compiled by the Commerce Department and relied on a more conservative growth estimate, the report said.

You can read the DMA’s economic study for yourself. It is groundbreaking new analysis, based on U.S. Department of Commerce data, which proves that previous claims for the amount of potential state tax losses due to online sales were, at best, wildly overstated.

The analysis, entitled “A Current Calculation of Uncollected State Sales Tax Arising from Internet Growth,” clearly shows that potential uncollected revenue to the states is about 85 percent less than predicted in prior studies. In 2001, for example, the states claimed that approximately $13 billion went uncollected due to their inability to force out-of-state retailers to act as their unpaid tax collectors, while in fact the total amount potentially uncollected was about $1.9 billion.3

Much-cited studies from the University of Tennessee erroneously relied on data from the Internet boom years and made flawed assumptions about ecommerce that resulted in their vast over-estimates,” says the DMA. Among the flaws in the UT studies:

1. Assuming Internet growth rates of 38 percent annually – which might have seemed plausible during the bubble era, but which subsequent economic experience has invalidated.
2. Failing to separate business-to-business Internet activity from pre-existing business-to-business ecommerce
3. Using an excessively low rate of business compliance on sales tax remittance
4. Failing to note the decline of “pure-play” online retailing in favor of bricks-and-clicks.

Points #2 and #3 in the list above refers to UT failing to factor out business-to-business sales made over the Electronic Data Interchange network. The EDI is a proprietary system that predates the commercial Internet and is used by large businesses to manage orders from suppliers. Users of this system, which still handles most wholesale ecommerce transactions, almost always report and pay taxes on these purchases. The DMA factored out EDI transactions.

As a business owner and an internet and out of state supplier of goods, I for one will not sign up to gross miscarriage of legislation.

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