LONG BEFORE the Berlin Wall fell, I heard the story of a genie granting wishes to two farmers. The first, a hearty American of limited means, gazed across his field and saw his neighbor with four fine milk cows. Looking wearily at his own aging heifer, he commanded: “I wish I had eight cows!’’ The second, a Soviet peasant in the same situation, saw his neighbor’s success and commanded, “Kill his cows!’’
If you think this is a joke whose time has passed, think again. We’ve arrived in the digital age where Walmart, playing the role of the Soviet peasant, looks out at the online retailers of the world and commands, “Tax them!’’ More accurately, Walmart supports legislation in Congress that would force the e-commerce companies to collect taxes from customers on behalf of the states.
The rub here is that the online companies in question have no physical presence in the states seeking these revenues. Under federal law and the Constitution, a state cannot force businesses to do its bidding if they have no brick-and-mortar facilities there. The relevant Supreme Court case — called Quill Corp. v. North Dakota — involved mail-order businesses, but the principle applies to today’s online sellers.
Traditional retailers would have us believe this is the scourge of the modern world and have decided to do something about it: Lobby Congress to change the law. Many states, strapped for cash and happy to have someone else do their tax collecting, are only too willing to enlist the help.
The Quill case exposed a weakness in retail sales taxes: Technically, residents are responsible for paying the tax - often termed a “use’’ tax. A Massachusetts resident buying a dining room table in New Hampshire, for example, is supposed to declare the item and send the taxes to Beacon Hill. The same requirement applies to the big screen TV you bought from Amazon. Good luck with that.
No tax system is perfect. They all suffer from differences in efficiency, compliance rates, overhead costs, and complexity. But forcing out-of-state businesses to track customer location, collect taxes, and distribute funds to multiple jurisdictions represents a dramatic expansion of federal and state power over private enterprise. Is it really a good idea to let states force a business outside their jurisdiction to collect taxes on their behalf?
The digital economy is not the black market. Rather than encumber a growing sector of our economy with an inefficient tax system, states should be searching for ways to streamline and simplify taxes. It’s not as though they’ve been denied ample mechanisms for reaching into the pockets of their citizens. Property taxes, excise taxes, business profit taxes, and personal income taxes allow states to collect from everyone who works, lives, or holds assets within their borders.
The idea that federal intervention is justified because the state isn’t getting its fair share from Zappos shoe sales is a bridge too far. The growth of online retail isn’t about tax avoidance. Customers like the ease of access, the wide range of available products, and the convenience of having their purchases delivered. Meanwhile, the emergence of digital goods, cloud storage, and online gaming - which don’t involve the delivery of physical goods to physical locations - raises new questions about what should be subject to taxation. But it’s only a matter of time before states demand a piece of these revenues as well.
Of course, the sponsors of the federal legislation make one of the most powerful arguments against the idea. Bills before the the House and Senate include an exemption for small businesses - the classic tip-off that something is a bad idea. It’s the equivalent of the Soviet farmer saying, “If you only have one cow, I won’t kill it.’’
But even larger businesses will endure significantly higher costs. Forty-five states and the District of Columbia collect sales taxes. Many cities do as well. Online firms will have dozens of new tax accounts to track and manage, each subject to its own burdens of audit and enforcement.
Outside Washington’s beltway, this story has yet to pick up much steam, but like any fight over big money, the battle lines are being drawn - old vs. new, bricks vs. digital, maybe even Soviet vs. American.
John E. Sununu, a regular Globe contributor, is a former US senator from New Hampshire.