For months, the Trump administration has rightfully been trying to thwart attempts by some European governments to impose a new corporate “digital tax” on American high-tech giants. This campaign to block internet-inspired extraterritorial taxation — taxation of income earned outside of a jurisdiction — is strongly supported by the American business community. But the White House, in an odd twist that turns its European Union digital tax arguments upside down, just argued before the Supreme Court that the same kind of extraterritorial taxation is acceptable when carried out by American states on retail sales on the internet.
Does the left hand of the Trump administration know what the right hand is doing on internet-related tax policy? Are American corporate leaders who have ignored the issue of internet sales taxes about to suffer a key setback in relation to the European Union tax grab? And does sound tax policy go out the window if the president seems to think Amazon is in the cross hairs?
The implications of tax policy for internet business models is important: Many enterprises, large and small, are adopting a range of internet-enabled services. Good principles of taxation are the same at the state, national and international levels. They include the idea that each state or country has carte blanche to tax income, sales and whatever else it wants within its borders (as long as its taxpayers are O.K. with the burden), but they should not step on the toes of other political jurisdictions by taxing activity that happens across the border. Given the eternal lure of governments to tax people who can’t remove them from office (remember the old “No taxation without representation” mantra?), this is a timeless concern.
This is the issue at the heart of the Supreme Court case South Dakota v. Wayfair, a multibillion-dollar retailer with no physical facilities in South Dakota that is using the internet to serve South Dakota customers. If South Dakota were to win this case, extraterritorial taxation would be allowed by states. Retailers would be forced to abide by every state’s in-state sales tax laws regardless of whether they have any in-state business operations. This has been a goal of states for over 50 years, and it’s the third time the issue has reached the Supreme Court. The result of the last visit, in 1992, is referred to in tax circles as the Quill decision.
State governments want to see Quill overturned