20 July 2013

Taxation via sales

Arthur B. Laffer, of the famous Laffer Curve, puts forth that e-commerce sales taxes could be used to cut income taxes in a 17 JUL 2013 USA Today article.  But this brings up the question of not only is this a smart thing to do (and there is no guarantee that governments will curb spending so as to allow for a cutting of income tax to do this) but if it is Constitutional.  In Art I, Sec. 8 is part of the answer to the Constitutional question:

Section. 8.

The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;

That would apparently be it, right?

An interesting case sheds some light on this, and that is National Bellas Hess v. Dept. of Revenue – 386 US 752 (1967) (Source: Justia) that involved a mail order house in MO getting charged for taxes to be collected in IL by their Dept. of Revenue.  In the conclusion there was this:

Held: The Commerce Clause prohibits a State from imposing the duty of use tax collection and payment upon a seller whose only connection with customers in the State is by common carrier or by mail. Pp. 386 U. S. 756-760.

And going to the referenced section, the support for this is as follows:

National argues that the liabilities which Illinois has thus imposed violate the Due Process Clause of the Fourteenth Amendment and create an unconstitutional burden upon interstate commerce. These two claims are closely related. For the test whether a particular state exaction is such as to invade the exclusive authority of Congress to regulate trade between the States, and the test for a State's compliance with the requirements of due process in this area are similar. See Central R. Co. v. Pennsylvania, 370 U. S. 607, 370 U. S. 621-622 (concurring opinion of MR. JUSTICE BLACK). As to the former, the Court has held that

"State taxation falling on interstate commerce . . . can only be justified as designed to make such commerce bear a fair share of the cost of the local government whose protection it enjoys."

Freeman v. Hewit, 329 U. S. 249, 329 U. S. 253. See also Greyhound Lines v. Mealey, 334 U. S. 653, 334 U. S. 663; Northwestern Cement Co. v. Minnesota, 358 U. S. 450, 358 U. S. 462. And, in determining whether a state tax falls within the confines of the Due Process Clause, the Court has said that the "simple but controlling question is whether the state has given anything for which it can ask return." Wisconsin v. J. C. Penney Co., 311 U. S. 435, 311 U. S. 444. See also Standard Oil Co. v. Peck, 342 U. S. 382; Ott v. Mississippi Barge Line, 336 U. S. 169, 336 U. S. 174. The same principles have been held applicable in determining the power of a State to impose the burdens of collecting use taxes upon interstate sales. Here too, the Constitution requires "some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax." Miller Bros. Co. v. Maryland, 347 U. S. 340, 347 U. S. 31 345; Scripto,

Page 386 U. S. 757

Inc. v. Carson, 362 U. S. 207, 362 U. S. 210-211. [Footnote 9] See also American Oil Co. v. Neill, 380 U. S. 451, 380 U. S. 458.

In applying these principles, the Court has upheld the power of a State to impose liability upon an out-of-state seller to collect a local use tax in a variety of circumstances. Where the sales were arranged by local agents in the taxing State, we have upheld such power. Felt & Tarrant Co. v. Gallagher, 306 U. S. 62; General Trading Co. v. Tax Comm'n, 322 U. S. 335. We have reached the same result where the mail order seller maintained local retail stores. Nelson v. Sears, Roebuck & Co., 312 U. S. 359; Nelson v. Montgomery Ward, 312 U. S. 373. [Footnote 10] In those situations, the out-of-state seller was plainly accorded the protection and services of the taxing State. The case in this Court which represents the furthest constitutional reach to date of a State's power to deputize an out-of-state retailer as its collection agent for a use tax is Scripto, Inc. v. Carson, 362 U. S. 207. There, we held that Florida could constitutionally impose upon a Georgia seller the duty of collecting a state use tax upon the sale of goods shipped to customers in Florida. In that case, the seller had

"10 wholesalers, jobbers, or 'salesmen' conducting continuous local solicitation in Florida and forwarding the resulting orders

Page 386 U. S. 758

from that State to Atlanta for shipment of the ordered goods."

362 U.S. at 362 U. S. 211.

But the Court has never held that a State may impose the duty of use tax collection and payment upon a seller whose only connection with customers in the State is by common carrier or the United States mail. Indeed, in the Sears, Roebuck case, the Court sharply differentiated such a situation from one where the seller had local retail outlets, pointing out that "those other concerns . . . are not receiving benefits from Iowa for which it has the power to exact a price." 312 U.S. at 312 U. S. 365. And in Miller Bros. Co. v. Maryland, 347 U. S. 340, the Court held that Maryland could not constitutionally impose a use tax obligation upon a Delaware seller who had no retail outlets or sales solicitors in Maryland. There, the seller advertised its wares to Maryland residents through newspaper and radio advertising, in addition to mailing circulars four times a year. As a result, it made substantial sales to Maryland customers, and made deliveries to them by its own trucks and drivers.

In order to uphold the power of Illinois to impose use tax burdens on National in this case, we would have to repudiate totally the sharp distinction which these and other decisions have drawn between mail order sellers with retail outlets, solicitors, or property within a State and those who do no more than communicate with customers in the State by mail or common carrier as part of a general interstate business. But this basic distinction, which, until now, has been generally recognized by the state taxing authorities, [Footnote 11] is a valid one, and we decline to obliterate it.

Page 386 U. S. 759

We need not rest on the broad foundation of all that was said in the Miller Bros. opinion, for here there was neither local advertising nor local household deliveries, upon which the dissenters in Miller Bros. so largely relied. 347 U.S. at 347 U. S. 358. Indeed, it is difficult to conceive of commercial transactions more exclusively interstate in character than the mail order transactions here involved. And if the power of Illinois to impose use tax burdens upon National were upheld, the resulting impediments upon the free conduct of its interstate business would be neither imaginary nor remote. For if Illinois can impose such burdens, so can every other State, and so, indeed, can every municipality, every school district, and every other political subdivision throughout the Nation with power to impose sales and use taxes. [Footnote 12] The many variations in rates of tax, [Footnote 13] in allowable exemptions, and in administrative and recordkeeping requirements [Footnote 14] could entangle National's interstate

Page 386 U. S. 760

business in a virtual welter of complicated obligations to local jurisdictions with no legitimate claim to impose "a fair share of the cost of the local government."

The very purpose of the Commerce Clause was to ensure a national economy free from such unjustifiable local entanglements. Under the Constitution, this is a domain where Congress alone has the power of regulation and control. [Footnote 15]

The judgment is


Yes you really do need that entire section although it comes to a sweet and easy conclusion, the justification of it is important.  The SCOTUS is reversing itself within the entire thing, and invalidating a system that it held to be Constitutional at one point.  Thus the US Congress could impose a separate sales tax, not based on local sales taxes due to the undue burden trying to comprehend the vagaries of local sales taxes entails.  This rests upon the power domain of Congress in the realm of Interstate Taxes and the requirement of due process for collection.

What the SCOTUS has invalidated is the 'fair share' of taxes by local governments for the protection of commerce that the interstate commerce goes through.  You can't do that as a local or State government, and attempting to impose that from the federal level incurs the exact, same problems of domain and due process.  The power domain to capture any such taxes from direct Interstate Trade is due to the federal government alone.  And the same conditions for catalog sales are directly analogous to Internet sales: it takes place via common carrier, there is no physically present operation of the seller in the buyer's State or jurisdiction unless it is within the State, then all State laws apply, and there can be no taxation to help support coverage of the infrastructure by a State or local government.

Thus via the Constitution the Congress would be able to impose a separate sales tax, applicable only to interstate commerce which would then flow into the federal coffers.  This would put the US federal government as having an interest in the transactions involved and would allow the full power of the federal government to get information from such transactions.  The actual wisdom of that, given what the NSA, DoJ and IRS are doing at present is questionable, at best.

Now in 15 USC 10B there is Sec. 381 that looks at State net income tax for those people doing interstate commerce and stops the State from doing that.  That would be a roundabout way to get a State 'sales tax' via the interstate derived income put under the guise of an income tax, and you can't do that.  This protects those who are not incorporated and acting as individuals from getting socked by this sort of thing by the States.

Going on to Sec. 391, you come to an actual interstate sales item: electricity.  And States can't tax out of State producers of that commodity, either.

There is a problem with 15 USC, just at a glance.  There are 110 Chapters to it covering everything from Armored Car Industry Reciprocity (Ch. 85) to Sports Agent Responsibility And Trust (Ch. 104) to Pool And Spa Safety (Ch. 106) to Hobby Protection (Ch.48).  If you want to know about Interstate Horseracing, Switchblades and Global Change Research, you can find Chapters for them, too.  You would think that something like business taxation would be held under it, wouldn't you?  No that's under 26 USC, with the taxation stuff... but if you want an exemption, give-away, freebie or other such stuff then you gotta be in 15 USC, apparently.  And, yes, since everyone who tries to make an interstate sale will then have an interest in getting an exemption for this or that, you can expect 15 USC to explode in size.  It used to go to 19 Misc., but we passed that ages ago.  If Mr. Laffer thinks you can get an equal code to apply to all people without some trying to get special carve-outs, then he is living in a different dimension on a different world and one that is, apparently, altruistic in nature.

In 26 USC 1, Section 11 you can find Taxes on Corporations.

Now how do corporations get their money?  Do they find it buried under trees in their back yards?  Do they suddenly come upon oodles of cash laying on their doorstep every morning?  Or do they get it through, oh, the sales of goods and services?

Hands up if you answer anything other than sales, unless you are thinking of charities, certain non-profits with their hats out, religious institutions, or that ex-Governor of New Jersey who fleeced people and has never been charged with anything for it.

Now they can get revenue from other sources and those are covered as well:

(2) Certain personal service corporations not eligible for graduated rates

Notwithstanding paragraph (1), the amount of the tax imposed by subsection (a) on the taxable income of a qualified personal service corporation (as defined in section 448(d)(2)) shall be equal to 35 percent of the taxable income.

(c) Exceptions

Subsection (a) shall not apply to a corporation subject to a tax imposed by—

(1) section 594 (relating to mutual savings banks conducting life insurance business),

(2) subchapter L (sec. 801 and following, relating to insurance companies), or

(3) subchapter M (sec. 851 and following, relating to regulated investment companies and real estate investment trusts).

Yes, that is starting to leave you with that goods and services stuff.

You can have a sales tax run by Congress or you can have a sales tax run by Congress.  If you are very, very unlucky you will get both, because, according to the US Constitution, Congress can tax you on sales and income if you are a corporation and I bet that these regulations will go down to individuals on EBay as well.

Isn't it swell that Mr. Laffer thinks that business income taxes would go down if you get a sales tax in interstate commerce?

Is there a problem with this?

Oh, yes, there is.

First – Just on the Income Tax as a proposition and I'll give you its Amendment:


Passed by Congress July 2, 1909. Ratified February 3, 1913.

Note: Article I, section 9, of the Constitution was modified by amendment 16.

The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.

Where is a progressive income tax allowed in this?  That is to say: where is Congress allowed to treat different amount of earnings differently encapsulated in this Amendment?  It speaks to source and getting it without the old apportionment via population bit that was used up to 1919, but where does it allow Congress to put in different and graduated tax rates?  Because, you know, it doesn't, and via the prior texts all citizens are to get equal treatment under the law.  No favorites.  No scapegoats.  I'm starting to think that there is a test case in all of this.  And, via Instapundit, James Huffman seems to have an idea on this.

Secondly there is Art I, Sec. 9, in part:


No Tax or Duty shall be laid on Articles exported from any State.

Hmmm... well that is interstate trade, now, isn't it?  And if you are trying to tax the sales of something being exported from a State, which is what interstate trade is, then no Tax or Duty may be laid upon it.  Period.  By any government.  This would include Impost Taxes, which Congress gets as well, which are normally considered for foreign trade and Excise Taxes, which are for inland trade.

As the US already had VT and NH, which had some trade with Canada but no ports to speak of, the Framers knew about the idea of inland trade and appear to have put a stop to trying to tax it by anyone.  There are fees for interstate transportation and inspections which are allowed, yes, but not a tax on the actual trade itself beyond those tolls, fees and other sorts of things necessary to ensure trade amongst the several States.  Excise taxes are commonly placed on commodities, like gasoline and its tax, which is done per gallon, not per amount of sales.  Similarly tobacco and alcohol can get an Excise Tax based on per unit or per volume distribution that is a set amount and not variable by the actual cost of the item involved.  As each of these taxes are for items by type, not by cost, and are regulated by graduation for that item (gallon, per number, or similar) and used to specific purposes for that Excise Tax that is not general revenue, they are allowable.  It is not a sales tax, as such, but one on the amount of a commodity purchased to cover the cost of its transportation, safety, or other clearly defined public problem to which it contributes.

Impost Taxes usually are put into the customs and trade realm, where a percent of the value brought into a Nation is then levied against the goods, and that levy must be paid so they can be accepted into the trade of a Nation.  This is a tax to support the overhead of government to run the Nation from foreign trade and used to be a major way the US government generated revenue before the era of Free Trade.

Third – The major sticking point is that the federal government is already collecting a form of sales tax on the total revenue of a corporation.  It is covered with that, by definition, and since Congress has made that a part of the definition of 'income' it can decide if it wants to tax total corporate income or only interstate trade sales income as a separate item.  Individuals selling to individuals, however, might suddenly find themselves with a State exemption for interstate income, but suddenly liable for a federal tax on them via this, if it isn't already considered a part of normal income.  You'll need to consult 26 USC 1 Ch.1 on that.

So would a NST be viable?  Not really, particularly the Art. I, Sec. 9 piece that specifically prohibits it from State exports.  States are prohibited from taxing them as well save for inspections and such in a part of Art I, Sec 10 that I don't use that often:

No State shall, without the Consent of the Congress, lay any Imposts or Duties on Imports or Exports, except what may be absolutely necessary for executing it's inspection Laws: and the net Produce of all Duties and Imposts, laid by any State on Imports or Exports, shall be for the Use of the Treasury of the United States; and all such Laws shall be subject to the Revision and Controul of the Congress.

So no one can tax sales between the States, as such, save to count it as income for corporations.  That 'No tax or duty...' is a passive clause of the US Constitution and by not specifying who it applies to in the realm of power domains (federal or State legislative, judicial, executive) it then applies to all of them without exception.  This is not a 'Congress shall not...' sort of deal, but a full and broad prohibition that was absolutely intentional by the Framers.

Alexander Hamilton put it like this in Federalist #12:

In America, it is evident that we must a long time depend for the means of revenue chiefly on such duties. In most parts of it, excises must be confined within a narrow compass. The genius of the people will ill brook the inquisitive and peremptory spirit of excise laws. The pockets of the farmers, on the other hand, will reluctantly yield but scanty supplies, in the unwelcome shape of impositions on their houses and lands; and personal property is too precarious and invisible a fund to be laid hold of in any other way than by the inperceptible agency of taxes on consumption.

If these remarks have any foundation, that state of things which will best enable us to improve and extend so valuable a resource must be best adapted to our political welfare. And it cannot admit of a serious doubt, that this state of things must rest on the basis of a general Union. As far as this would be conducive to the interests of commerce, so far it must tend to the extension of the revenue to be drawn from that source. As far as it would contribute to rendering regulations for the collection of the duties more simple and efficacious, so far it must serve to answer the purposes of making the same rate of duties more productive, and of putting it into the power of the government to increase the rate without prejudice to trade.

The relative situation of these States; the number of rivers with which they are intersected, and of bays that wash there shores; the facility of communication in every direction; the affinity of language and manners; the familiar habits of intercourse; -- all these are circumstances that would conspire to render an illicit trade between them a matter of little difficulty, and would insure frequent evasions of the commercial regulations of each other. The separate States or confederacies would be necessitated by mutual jealousy to avoid the temptations to that kind of trade by the lowness of their duties. The temper of our governments, for a long time to come, would not permit those rigorous precautions by which the European nations guard the avenues into their respective countries, as well by land as by water; and which, even there, are found insufficient obstacles to the adventurous stratagems of avarice.

And then they put in the things to make it difficult to exact a price for that trade in personal property that governments will seek because their hunger knows no limits, and thus it must be limited at the start.

You want an NST?

Do you really want to let the IRS have that sort of information about who buys what and when, how much was paid and so on?  Because it will want an itemized list, you know?  Just to make sure.  And the IRS is so safe and secure, non-threatening and non-partisan, right?

In any event the Framers gave us Art I, Sec 9 to deal with the question.

We don't need another tax.

We need a smaller government that can be held accountable to the TAXPAYER.

We don't have that now.

And an NST doesn't get you there, either.


chrismarklee said...

Laffer believed that tax code could help the economy and create U.S. jobs.

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A Jacksonian said...

Chris - Yup, he does.

Still can't get there via an NST without an Amendment.

How about a flat tax, instead?