3. Require that any sales taxes imposed on Internet sales be origin-based so that they will be consistent with the U.S. Constitution and prevailing nexus standards.

State and local leaders may fear that extending the Internet Tax Freedom Act and codifying a nexus standard would prohibit them from collecting any sales taxes on electronic transactions. As mentioned above, however, the ITFA and existing Supreme Court nexus jurisprudence do not prohibit all forms of taxation. What they do prohibit, respectively, is "multiple" or "discriminatory" Internet taxes and extraterritorial taxation of remote vendors of commerce in general—exactly the sort of burden that would be imposed by the NGA plan.

Adoption of an origin-based (or "seller-state") system of sales tax administration "technically would take care of a lot of these problems," argues ACEC member Gene Lebrun, former president of the National Conference of Commissioners on Uniform State Laws. "I think we've got to think outside the box to resolve these issues."28

Commissioner Lebrun is correct, because under an origin-based system, sales taxes would be collected at the source, or point of sale, instead of at the destination, or point of consumption. All commercial vendors (including Internet vendors and mail order companies) would be required to collect the sales taxes owed to governments within the state or location where they have a substantial physical presence. They would not be required to remit taxes to states or localities outside their home territory, where they have no physical presence.

Terry Ryan, director of state and local taxes for Apple Computer, and Eric Miethke, a partner with the Sacramento-based law firm of Nielsen, Merksamer, Parrinello, Mueller, & Naylor, have detailed the many advantages an origin-based system would have in practice.29 According to Ryan and Miethke, an origin-based or seller-state system would

  • minimize the burden on sellers by requiring sellers to know and abide by only the tax rates and regulations within their principal place of business;

  • maximize the amount of tax collected for states by making compliance easier and incorporating activity (such as foreign shipments) that currently are untaxed;

  • remove nexus uncertainty and constitutional concerns by taxing only companies within a state or local government's borders;

  • eliminate the threat of double taxation by imposing taxes only once, at the point of sale;

  • preserve local jurisdictional tax rights instead of adopting a harmonization proposal like the NGA plan, which would create a de facto national sales tax;

  • respect privacy rights by not requiring that any special information be collected about a buyer and by not empowering a third party tax collector to collect information about buyers;

  • respect federalism principles and preserve jurisdictional tax competition by permitting each state to determine its own tax policies and encouraging healthy state-by-state tax rivalry; and

  • be more politically feasible, since it remains unlikely that Congress will alter existing nexus standards and allow extraterritorial taxation by state and local governments.

Andrew Wagner, staff director of tax law with the FDX Corporation, and Wade Anderson, former director of tax policy for the Texas Comptroller of Public Accounts, have submitted a formal proposal to the commission that outlines how such an origin-based system would work.30

Though their proposal is tailored to the sale of digitized products sold over the Internet, they argue that an origin-based system could be applied to all types of sales.

Wagner and Anderson also conclude that an important advantage of an origin-based system is that it "represents a bottom-up approach to the question rather than a top-down approach." There is no need to impose a confusing, top-down system of sales tax collection on America when state and local governments could move directly to a much more straightforward, bottom-up system of origin-based sales tax administration on their own.

Many state and local officials continue to fear that an origin-based system of sales taxation would cause a "race to the bottom" by encouraging some states or localities to lower tax rates, or even to create tax-free "tax havens" to attract commercial vendors to their jurisdictions. The question is: Why should this sort of vigorous jurisdictional tax competition be considered such a lamentable development?

Indeed, this is exactly what the Founders hoped would occur in the federalist system of government they created. By allowing states and localities to tailor their tax systems to their own needs and simultaneously allowing companies and consumers to "vote with their feet" by shopping around for favorable tax and regulatory environments, an origin-based system of sales taxation would enhance and reinvigorate federalism in the United States. If "race to the bottom" fears persisted, a revenue-sharing compact could be arranged among the states to redistribute revenue more evenly.

Arguments for destination-based "use" taxes on interstate commerce and against an origin-based sales tax system are parochial attempts to protect in-state vendors and avoid rigorous jurisdictional tax competition. As Dean Andal appropriately concludes, "The use tax is not a surrogate consumption tax as some would suggest. It was a device conceived to protect in-state merchants."