Fund Transfer Protocol

States eye Internet sales

Julian Sanchez from the January 2004 issue

The principles of federalism embodied in the Constitution are more than a vital check on overweening power; they're a great source of online discounts.

Because Congress has power over interstate commerce, the courts have thus far ruled that a state cannot require businesses that lack a physical "nexus" in the state to collect sales taxes, meaning goods bought online are, for practical purposes, tax free. All that may change under the Streamlined Sales and Use Tax Act, versions of which have been introduced in both the House and Senate, which would empower states to create a compact -- already being formed -- establishing common rules for reciprocal tax collection and remittance.

In an October editorial, The Wall Street Journal suggested that such an agreement might give rise to a national sales tax. That, says Cato Institute Director of Telecommunication Studies Adam Thierer, could undermine healthy tax competition between states. If Internet sales are to be taxed, suggests Thierer, states should adopt a uniform rule of taxing goods at the point of origin, rather than enforcing a single rate or taxing in the state where goods are consumed.