Open Letter to the South Carolina House Ways and Means Committee: Defeat Unconstitutional Online Sales Tax Effort by Rejecting S.170
To Members of the South Carolina House Ways and Means Committee,
On behalf of National Taxpayers Union’s (NTU) South Carolina members, I strongly urge you to reject S.170, a bill that would force hardworking residents of the Palmetto State to pay more in sales taxes. S.170 was authored by Senator Marlon Kimpson (D-North Charleston) and passed the Senate on March 31, 2015. After crossing over, the bill was referred to the House Ways and Means Committee.
In 1992, the U.S. Supreme Court issued its decision in Quill Corp v. North Dakota, which held that states cannot require remote sellers to collect sales taxes unless the seller has a physical presence in the state. In legal parlance, this physical presence requirement is known as “nexus.” The Supreme Court noted that Congress could change this requirement at any time. To date, however, Congress has prudently not permitted states to tax remote sellers outside their jurisdiction.
S.170 attempts an end run around the Supreme Court’s Quill decision by dramatically expanding the number of activities that create “nexus.” As the non-partisan South Carolina Revenue and Fiscal Affairs Office noted in the Fiscal Impact Statement, “[the bill] imposes an obligation to collect sales and use tax on an out-of-state retailer that enters into an agreement with a resident of [South Carolina] who, for a commission or other consideration, directly or indirectly refers potential customers, by internet link or otherwise, to the out-of-state retailer.”
Supporters of S.170 rest their case on two faulty premises. First, proponents suggest that the status quo is unfair to brick and mortar retailers in South Carolina, which are required to charge, collect and remit state and local sales taxes. That is debatable, but it obscures the reality of S.170, which targets only a tiny subset of online transactions. This piecemeal attempt at parity would cause far more harm than good. If proponents of this bill want states to be able to tax allonline sales, federal action is necessary.
Next, proponents argue that S.170 will be a cash cow for state government. This is false. After various states passed “affiliate nexus” laws, companies like Amazon terminated their associate programs in these states. In 2011, for instance, Illinois passed a similar law to the one under consideration in South Carolina. As a result, it was estimated that 6,000 companies – two-thirds of Illinois’ affiliates – went out of business or moved to another state.
As the Fiscal Impact Statement for S.170 notes, “Given that South Carolina’s remote sales are so much smaller compared to New York and California, in magnitude and on a per capita basis, we expect that remote retailers will largely terminate their affiliate programs much like their reaction to similar legislation enacted in other states. This expected reaction by the remote retailers’ will limit any expected revenue increase from the additional reporting and enforcement tools provided in this bill.” (Emphasis added). If S.170 becomes law, fewer South Carolinians will be employed as part of affiliate programs and government revenue increases will be negligible at best.
On top of the bad economics of S.170, the prospect of paying taxes on more e-commerce transactions is not popular with your constituents. A 2014 poll commissioned by NTU and the R Street Institute, a non-partisan think tank, showed a staggering 71 percent of South Carolina voters agree that “The Internet should remain as free from government regulation and taxation as possible” as compared to just 23 percent who disagree (with a 4.9% margin of error).
Given the limited scope of S.170, it would provide minimal tax parity between remote sellers and brick and mortar retailers. In addition, independent analysis confirms that affiliate nexus statutes like the one contemplated by S.170 will not significantly increase government revenue and would likely cause many large e-commerce companies to wind down their South Carolina affiliate programs, thereby shuttering companies based in the Palmetto State. Finally, and perhaps most importantly for legislators, South Carolina voters overwhelmingly oppose paying additional sales taxes on items they purchase online. For these reasons, NTU strongly encourages you to oppose S.170.
Counsel and Government Affairs Manager