Statement To the South Carolina Tax Realignment Commission

Statement of John Stephenson
State Government Affairs Manager
National Taxpayers Union

To the South Carolina Tax Realignment Commission

Regarding the Online Sales and Affiliates Tax Proposals

     Chairman Maybank and Members of the Commission, my name is John Stephenson and I am the State Government Affairs Manager for the National Taxpayers Union (NTU), the nation's oldest and largest non-partisan advocate for overburdened taxpayers. I am honored to be able to present these remarks on behalf of NTU's nearly 4,400 members in South Carolina. I commend you and your colleagues for your efforts thus far to achieve the mission that Governor Sanford and the General Assembly intended for the Commission: to suggest ways to create a state tax system that attracts more businesses and individuals to South Carolina. In this spirit, I believe that further progress can and should be made toward the Commission's overarching goal. Accordingly, I urge you to reject any proposals that seek to require out-of-state retailers and their in-state affiliates to collect sales taxes on online transactions.

     On June 28, this Commission issued a draft report making recommendations for changes in South Carolina's sales tax code. Among the recommendations is a proposal for South Carolina to require out-of-state retailers who possess more than $10,000 in sales and those who also have a business referral agreement with a South Carolina resident to collect the state's sales tax on transactions. Additionally, the report recommends that South Carolina require out-of-state companies with "affiliates" in the state to collect sales tax.

     While some may regard these proposals as tax "reforms," they are actually poor tax policies. States that have attempted to prey upon online businesses beyond their borders – either through requiring out-of-state retailers to collect sales taxes or through creating "affiliate nexus" schemes – run the risk of inviting constitutional challenges for impeding the flow of interstate commerce. Moreover, these schemes do not make a tax system fairer or a state more competitive, and in fact have not raised the desired revenues.

     The U.S. Supreme Court has ruled that only retailers with a substantial connection, or "nexus" to a state, such as a warehouse, an outlet, or employees located in the state, are obligated to collect the state's sales tax. This means that retailers who do not have facilities or personnel in a given jurisdiction are not required to collect its sales taxes. It follows that there is no "substantial connection" between an online retailer and a website that links to the retailer.

     The experience of other states with these schemes demonstrates the perils of online sales tax regimes. New York, which in 2008 enacted a law requiring out-of-state retailers and their affiliates to collect sales taxes for online transactions with New Yorkers, has been sued on this very issue. The litigation continues to this day. Although several other states have considered online sales tax regimes, only North Carolina and Rhode Island have dared to follow New York with this controversial approach. Colorado has been able to enact only a significantly watered-down tax liability-reporting requirement.

     Aside from inviting constitutional challenges, these exotic tax practices have not yielded the promised revenues. In response to the new tax collection and reporting obligations in New York, North Carolina, Rhode Island, and Colorado, online retailers have shut down their affiliate programs in those states, depriving the states of the very revenues they sought to collect. Rhode Island's treasurer has urged the General Assembly to consider repealing the statute. Although New York has collected some revenues, the constitutional challenge to its tax law is an additional cost for the state and raises questions about whether the state can keep the money. A loss of business activity and revenues is the last thing any state needs during this time of economic uncertainty, and would certainly be in conflict with the intentions of this Commission.

     The stark reality is that these policies actually precipitate business closures, leading to loss of revenues for the state, job losses, and higher prices for consumers. They require online businesses to shoulder a higher cost of compliance due to the very high burden of complying with each of the sales tax jurisdictions where the customers reside. The Tax Foundation reports that 8,000 separate jurisdictions exist in the United States. Although some tools exist to provide information on sales tax requirements in these jurisdictions, these are not always the most reliable sources of data. Indeed, in the latter area online retailers, who represent an important segment of the nation's economy, are subject to a competitive disadvantage from so-called brick-and-mortar retailers, who only have to remit the sales tax where they are located.

     Instead of finding creative ways to collect more tax revenue from out-of-state retailers, the Commission should stay true to its mission of finding ways to make South Carolina's tax code simpler, fairer, and more competitive. The Commission should consider lowering the state sales tax rate of six percent, which is the 13th-highest in the nation and higher than sales tax rates in Georgia (4 percent) and North Carolina (5.75 percent). Additionally, according to the South Carolina Policy Council, the state's sales tax code runs a staggering 306 pages long, including 52 pages of frequently asked questions. No sales tax reform should be considered before addressing the complexity and many exemptions contained in the code. By taking this path, South Carolina can make itself more attractive to businesses and individuals.

     NTU strongly supports efforts to improve South Carolina's tax code for the benefit of the state and its citizens, both current and future. NTU and its members stand ready to work with you in devising proposals that will do so. I appreciate the opportunity to present these views.