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Some encouraging news from Texas

The Texas House has passed and sent on to the Senate HB 2010, a bill that would allow Texas businesses to seek declaratory judgments in state court to block tax collectors in other states from harassing them to collect local sales taxes. Similar bills have already passed in Virginia and Iowa.

Local officials have set their sights on e-commerce as a tempting new source of sales tax revenue. They want every online business, no matter where it might be located, to collect local sales taxes on anything it sells anywhere. But there are at least 7500 different sales tax systems in this country, and it would be an impossible burden for businesses, especially small businesses, to comply with them all.

For the time being, at least, federal law offers online businesses some measure of protection. A 1992 Supreme Court ruling, Quill v.North Dakota, found that local tax systems are so complicated that out-of-state retailers can’t be required to collect sales tax for states in which they have no physical presence. Nevertheless, state officials still keep trying, sometimes even hauling far away businesses into unsympathetic local courts in an attempt to force compliance.

Even with the law firmly on their side, it is enormously expensive for small businesses to defend themselves against this sort of harassment by out-of-state tax collectors. HB2010 would give Texas businesses important new legal protection by allowing them to go to their local Texas courts to have out-of-state sales tax grabs declared unconstitutional.

Meanwhile, proponents of the so-called Simplified Sales Tax Project are still seeking support for an end run around the Supreme Court. But local officials are starting to realize that simplifying local sales taxes is anything but simple. So far only 15 states have joined the SSTP. The rest are quickly figuring out that "simplifying" their sales tax systems to comply with SSTP requirements would end up actually costing them revenue.

Sensing that they are losing ground at the state level, SSTP supporters are now pushing for a federal law that would get around the Supreme Court by requiring local sales tax simplification nationwide. By the time Congress works through all the exceptions, qualifications, trade offs, add-ons, and concessions required to actually pass a bill, however, any "simplified sales tax" system would end up being just as complicated as what we have now. Complicated and expensive for online retailers, especially small businesses, and even for the local jurisdictions who have convinced themselves that uncollected online sales taxes are a pot of gold at the end of the rainbow.

So, while the debate over simplified sales tax schemes drags on, Texas and other states should be encouraged to do whatever they can to protect their locally based online businesses from unconstitutional harassment by out-of-state tax collectors by enacting declaratory judgment bills like HB2010.