Hector’s Unconstitutional Tax Grab

Hitting a few online stores for some last-minute Christmas presents? The state won’t assess a levy on your orders from vendors located in California or Minnesota or Louisiana — by statute (7-9-7.1), the New Mexico Taxation and Revenue Department “shall take no action” to tax purchases “used only for nonbusiness purposes.”

But as the Rio Grande Foundation has explained before, tax-free shopping in cyberspace is in the crosshairs of a broad coalition of Democrats and Republicans in Santa Fe. And last month, Attorney General Hector Balderas threw his support behind a national effort to smash the legal principle on which tax-free web shopping rests.

The “physical-presence rule” was established by the U.S. Supreme Court in 1967 (National Bellas Hess v. Illinois), and reaffirmed in 1992 (Quill Corp. v. North Dakota). It set a simple standard: No sales (or “use,” or “compensating”) taxes are required to be imposed on customers living in states where vendors lack a physical presence. Justices instituted the policy as a means to address the Constitution’s Commerce Clause, which gives Congress the sole authority to “regulate Commerce … among the several States.”

In essence, the justices left it up to the legislative branch, where it belongs. But in the quarter-century since Quill, Congress has exercised its freedom to do absolutely nothing about taxation and border-crossing sales. Bills have been drafted to codify the precedents, and bills have been drafted to mandate the collection of sales taxes on all transactions, regardless of where the seller and buyer are located. Not one has passed both chambers, much less been signed by a president.

Money-grubbing state pols always loathed National Bellas Hess and Quill, and for decades, they’ve seethed over congressional inaction on the issue. Lately, with the growth of online commerce, they’ve been conspiring to get around the High Court’s precedents. The end-runs have taken many forms — e.g., “transactional notice,” “click-through nexus.” South Dakota’s scheme was particularly brazen, though. It simply required all out-of-state vendors with gross revenue of over $100,000 or two hundred or more purchases in the The Mount Rushmore State to collect sales tax.

That brings us back to Balderas. South Dakota’s revenue reach has, predictably, winded up in litigation. Overturned (rightfully) by the state’s highest court last year, it could soon be heard by John Roberts, Anthony Kennedy, Clarence Thomas, et al. New Mexico’s attorney general has signed on to a letter from dozens of his colleagues asking the justices to lay Quill in its grave.

You can read the case’s amicus briefs here. Of particular note are the arguments filed by the National Taxpayers Union (NTU) and Americans for Tax Reform (ATR.) Both provide powerful reasons why Quill should stand.

NTU charges that the tax-the-Net lobby, including Balderas and his AG pals, is asking justices “to engage in the kind of legislative rulemaking that the Court sought to avoid in Quill.” Not only should the issue “be resolved by Congress,” but a decision by the Supreme Court to review the case “may very well stymie the work … to craft legislative solutions to these complex, difficult matters of interstate commerce.”

ATR asks that the physical-presence standard be upheld because it “created a ‘safe harbor’ for those whose only connection to the state is via common carrier.” Yes, technology has change in the last 50 years, but that “does not means that the laws revolving around taxing remote transactions should change with it.” (Americans have been ordering items from afar for a long, long time — “The R.W. Sears Watch Co.” launched what would become its iconic catalog in 1888.)

Overturning Quill won’t do anything to existing New Mexico law. But it will supply the High Court’s blessing to any bill that imposes the compensating tax on out-of-state vendors. Given how popular taxing Internet transactions is in Santa Fe, it’s unfortunate that the state has an attorney general who respects neither legal precedent nor sound tax policy.