A bill before the Legislature is unconstitutional and will slow Wyoming’s tech sector, Brett Glass, a Laramie internet businessman contends. Replacing multiple other taxes with an income tax will work better and is fairer, he contends. (Amazon)

In their struggle to overcome the state’s revenue crunch, Wyoming legislators can’t find a tax they like — except for a tax on internet sales.

Unfortunately, the tax would impose unconstitutional burdens and taxes upon interstate commerce while burdening economic development.

The likely result would be no new revenue (the Supreme Court is overwhelmingly likely to require the state to return anything it collects), millions of dollars wasted on a futile legal battle to defend the law, and damage to our state’s attempts to diversify its economy and develop new businesses.

Brett Glass

House Bill 19, the so-called “Amazon tax” bill, attempts to muscle out-of-state vendors into collecting sales and use taxes from Wyoming businesses and residents who order goods via the internet.

While the tax technically has been on the books for many years, it has rarely been enforced. Why? First, doing so would be intolerably intrusive. The government would have to snoop on citizens’ every purchase, online and off, to make sure every penny of tax was collected.

Second, many Wyoming residents simply believe that such a tax is fundamentally unfair. They already pay for shipping from vendors they are compelled to use because there’s no retail outlet nearby that sells what they need. Thus, many see the tax as a “penalty” for living in our sparsely populated state.

Third, the resources required to enforce the tax in a state like Wyoming would consume most of the revenue it generated.

Finally, the U.S. Supreme Court — in two cases (the most recent one being Quill v. North Dakota, handed down in 1992) — has ruled that a state may not reach beyond its borders and compel mail order vendors who do not have “nexus” — that is, which have no physical presence or employees in the state — to become its unpaid tax collector.

So, most states with sales and use taxes on the books — rather than hounding or spying on their citizens and risking a possible tax revolt — have simply not enforced it.

Sales and use taxes are also widely recognized as being highly regressive — that is, they take a larger percentage of income from the poor than from the rich. They discourage capital investment because they levy a tax at the time of purchase, often long before a business can begin to make money from its investment.

Do ‘Amazon Taxes’ help Main Street?

Some lobbyists and politicians claim that an “Amazon tax” will “level the playing field” between Main Street and online businesses. Among them is U.S. Sen. Mike Enzi, whose recently deceased chief of staff Flip McConnaughey was Laramie’s city manager during the mineral “bust” of the late 1980s and early ’90s.

Remembering that Laramie’s fiscal woes left its water and sewer infrastructure largely unmaintained for more than a decade, McConnaughey spearheaded an effort to pass the “Main Street Fairness Act.” The measure would have granted states authority to enter into a compact to tax interstate purchases. McConnaughey believed that this act would bolster local sales tax revenues, providing cities with more money to maintain their infrastructure.

Ironically, despite the name of the bill, most of the lobbying in support of it came from “big box” stores such as Walmart and Home Depot. These large chains did not worry about competition from “Main Street” businesses. They worried about growing online retailers such as Amazon.

Main Street businesses, for their part, have mixed feelings about the bill, especially in Wyoming. Why? Because local businesses in sparsely populated Wyoming have very small markets in which to sell locally. They recognize that to achieve even moderate economies of scale, they must sell by mail, as well as maintaining local storefronts, to grow.

Burdens on internet commerce — especially taxes which essentially amount to protective tariffs — harm these businesses. Under the proposed “Amazon tax” laws, as well as under the failed federal legislation, such businesses could grow only big enough to create perhaps half a dozen jobs before —wham! — they would be hit with the burden of collecting taxes for the governments of as many as 44 other states.

They have no relationship with these other states and have no physical presence in them. And because sales taxes often differ by county, city, and even city block, there would be more than 10,000 separate taxing jurisdictions for them to track. Large companies such as Walmart have the resources to do this; small businesses do not.

Amazon’s flip-flop

Online retailing behemoth Amazon.com, which advanced to a dominant position before states other than its native Washington attempted to tax its sales, originally opposed taxation of e-commerce. As it developed its own shipping empire and placed internet servers in more states (actions which, according to Quill, would require it to collect sales tax), it flip-flopped on this position.

Amazon recognized that  a lack of online sales taxes was an important factor in its early growth. It did not want future competitors to enjoy the same leverage.

It also realized that its own shipping network plus “sweetheart” deals with carriers such as UPS and FedEx give it a huge advantage over other retailers if everyone were forced to collect taxes.

And so, Amazon began to support e-commerce taxes. In fact, it actually sought to profit from sales and use taxes by charging small businesses hosted on its e-commerce site a fee to collect them.

Wyoming’s legislators must think long and hard before taxing the commerce that might help to resurrect their ailing economy. As an internet service provider, I am fortunate that federal law permanently exempted my own company’s services from such taxation. The many fledgling internet businesses to which I provide service enjoy no such exemption and must sell their products online if they are to grow into durable enterprises that will bolster Wyoming’s economy.

Wyoming is a small market. Vendors in other states may simply refuse to sell their products to Wyoming residents to avoid becoming sales tax collectors for our state government.

Because HB19 is unconstitutional under current law, its passage will prompt court battles likely to cost as much as would be collected. What’s more, fiscal responsibility will dictate that any revenues received be kept in a reserve account until those legal fights are settled.

The most likely outcome: We would not only fail to make one penny; we’d lose millions of dollars we can ill afford to lose.

For more on the issue of internet taxation, see the Tax Foundation report. Another more recent report by the Heartland Institute analyzes HB19 and concludes it would not help our state budget significantly even if it were not illegal and unconstitutional.

Our state needs more revenue. Rather than challenging settled federal law while seeking only small and unlikely gains, it should reconsider our entire tax structure. The Tax Reform 2000 Committee recommended this approach.

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In particular, legislators should consider swapping three taxes — the sales tax, the use tax, and the business personal property tax — for a modest income tax. Under such a system, akin to one now in effect in Montana, we would have fewer and more fair taxes better suited to a diversified economy.

Doing so eliminates the dual disincentives to investment inherent in sales/use tax and business personal property tax, which tax capital investments before they generate income.

It is vital that Wyoming citizens contact their senators and voice their opinions on HB19.

Brett Glass is an electrical engineer, author, inventor, and musician. He founded LARIAT, the world’s first wireless internet service provider, in Laramie, Wyoming in 1992.

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