Tax Analysts Blog

When Should Congress Preempt State Authority?

Posted on Aug 11, 2016

It is generally well accepted that the founders of the United States wanted a federalist system of government. That is, they wanted the national government to concern itself with issues that affect the entire country and the numerous subnational governments to take care of more local issues.  The powers granted to the federal government are enumerated in the U.S. Constitution. Article I, section 8 specifically provides that “Congress shall have the power to lay and collect taxes, duties, imposts and excises, to pay debts and provide for the common defense and general welfare of the Unites States.”

While the federal government has broad powers, if a power is not enumerated in the Constitution, it does not exist. The commerce clause, which is often debated in the state and local tax world, is a prime example. The federal government is granted the authority by the commerce clause to regulate commerce between states. Because that power is limited to interstate commerce, the federal government cannot regulate intrastate commerce.

While powers are distributed between federal, state, and local governments, federalism is not an exact science. Sometimes a federal law and a state law conflict. When that occurs, in accordance with the supremacy clause, federal law preempts the state law.  No matter how much a state may disagree with a federal law, federal law remains “the supreme law of the land.”

Preemption has emerged recently as a major issue in the state and local tax community. The most recent example was the enactment of the permanent extension of the ban on state and local taxation of internet access under the Internet Tax Freedom Act (PITFA). On February 24 President Obama signed the Trade Facilitation and Trade Enforcement Act of 2015, which included the permanent extension.

The Internet Tax Freedom Act was initially enacted in 1998. It implemented a three-year moratorium on the taxation of internet access by state and local governments. It was thought at the time that the imposition of sales tax on internet access was discriminatory or constituted double taxation because states already imposed taxes on the use of phone lines. The legislation was extended eight times before finally being made permanent.

While most states have been adhering to the temporary ban on taxing internet access, a few, which were grandfathered under the temporary legislation, continued to impose tax on internet access. Those states will be required to phase out existing taxes by June 2020. According to the Texas Comptroller of Public Accounts, Texas stands to lose $358 million per year.

The question being debated now is whether Congress had the authority to preempt the taxing power of Texas and the other six states (Hawaii, New Mexico, North Dakota, Ohio, South Dakota, and Wisconsin). PITFA is only one of the recent bills in Congress that would preempt state and local taxing powers. An opinion addressing when it is appropriate for Congress to step in would provide taxpayers and tax administrators with necessary guidance. Unfortunately, there doesn’t seem to be enough money at stake with PITFA to motivate states to push the issue. None of the states have suggested they will challenge the law, though it would be fascinating to see what happens if they did.

Read Comments (1)

Mike55Aug 10, 2016

"The question being debated now is whether Congress had the authority to preempt the taxing power of Texas and the other six states . . . [u]nfortunately, there doesn’t seem to be enough money at stake with PITFA to motivate states to push the issue."

I'd suggest $358M per year is more than enough to pursue this matter. The problem is not a lack of financial incentive, but rather the lack of a valid legal issue to push. The MTC's* recent attempts to suggest Congress needs additional/special authority to preempt state tax power is what the late Justice Scalia would have called "pure applesauce."

I certainly sympathize with the MTC's plight: those enumerated powers have grown awfully broad over the years. But sadly there's no authority out there that says "if Federalists ever lose control of SCOTUS then the Supremacy Clause will no longer apply to state taxation," so the MTC is out of luck on this one.

*The MTC and tax administrators are the only people I've seen raising this, so I'm assuming that's the source of the "debate" referenced in this article. I don't think there is a valid debate happening, but rather just one group attempting to create the appearances of one.

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