Taxing the internet

New York State seems to be trying to drive more business away according to this Editorial in today’s Wall Street Journal.

Return of the Web Tax
Wall Street Journal May 1, 2008; Page A16

New York Governor David Paterson is not repeating the worst mistakes of his predecessor. That’s too high, or perhaps we should say too low, a bar. Still, the new Governor has resurrected one of Eliot Spitzer’s least popular ideas, a tax on Internet sales that he hopes will raise more than $70 million a year. Despised by consumers and constitutional scholars alike, this new tax will hit e-shoppers within weeks.

By signing the state’s budget, Mr. Paterson is now attempting to do what Mr. Spitzer only threatened: Force out-of-state retailers such as to collect New York’s sales taxes, which approach 9%, including local levies. A 1992 Supreme Court decision called Quill bars exactly this type of money grab. The Supremes ruled that forcing such obligations on companies with no employees or buildings in a state could cripple interstate commerce. Without Quill, small Web merchants would have to answer to 7,500 state and local tax collectors.

New York’s spendthrift pols are desperate for revenue, however, especially given that their current budget increases spending by 5% despite the pinch on Wall Street that will hurt state coffers. The Governor apparently believes he can get to companies like Amazon through New Yorkers who run ads for Amazon on their Web sites. In fact, if nonemployees with some business relationship with a company were enough to establish physical presence, then Quill would essentially be meaningless.

The courts may well ax the Paterson tax on these grounds. But until they do, some companies will feel pressure to pay instead of doing battle with a state government. New York’s overall business tax climate ranks 48th among the states, according to the Tax Foundation. Mr. Paterson’s money grab could make New York the biggest loser when it comes to tax competitiveness.

When will politicians learn that companies act just like people and move to locations that provide an affordable atmosphere in which to grow?

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