- The Washington Times - Thursday, July 26, 2012

States are so desperate for cash that they’re getting sneaky. Combine the sluggish economy with Obamacare’s expensive Medicaid expansion and spiraling public-sector union benefit payments, and the usual tricks just aren’t balancing the books anymore. That’s why some are looking to tap out-of-state businesses as a new source of revenue.

On Tuesday, House Judiciary Committee Chairman Lamar Smith, Texas Republican, held a hearing on a bill he said “has bipartisan support from members both on and off this committee” to let states tax Internet sales. The Marketplace Equity Act, sponsored by Rep. Steve Womack, Arkansas Republican, and Rep. Jackie Speier, California Democrat, would force out-of-state companies to collect sales taxes as long as a state’s tax policies are simplified and small sellers are exempt.

Traditional brick-and-mortar retailers and Internet companies have been at one another’s throats over the sales tax issue, but they are in full agreement regarding another form of remote revenue generation: imposing business taxes on firms that aren’t physically located in the state. Ever since the Supreme Court’s 1992 Quill v. North Dakota decision, state governments have only been allowed to tax firms with a “physical presence” within their borders. That has led state legislators to get creative on what constitutes a physical presence.

Eleven states will tax a company over a phone-number listing in the yellow pages. Fifteen states will tax companies that host their websites within the states’ borders. Last summer, the House Judiciary Committee passed the Business Activity Tax Simplification Act, which would tighten the definition of physical presence so companies aren’t double- or triple-taxed.

Two Virginians, Republican Rep. Bob Goodlatte and Democratic Rep. Robert C. “Bobby” Scott, introduced the bill to ease the burden on commerce. “If businesses don’t know from state to state what the requirements are for taxes, they have to waste a lot of money on accountants and lawyers before deciding to expand their business into the state next door,” Mr. Goodlatte said in an interview with The Washington Times. “This establishes a clear, bright line test so you only pay corporate taxes if you go over that line. It would encourage businesses to expand across the entire country because they know the rules if they go into another state.”

Grover Norquist of Americans for Tax Reform explained why he strongly supports reining in the states and keeping them away from online commerce. “Goodlatte’s bill stops state legislators from taxing people who can’t vote them out of office, but the Internet tax bills let states reach across their borders to impose the burden of tax collection on out-of-state residents,” the anti-tax crusader told The Washington Times. “This is the second coming of taxation without representation in America.”

Naturally, Mr. Goodlatte’s bill is a threat to the extra cash these states are reaping, so they’ve kept it from a floor vote. Given the hardship businesses already face in this economy, House leaders need to make passing the bipartisan Goodlatte bill a priority.

Emily Miller is a senior editor for the Opinion pages at The Washington Times.