Amazon’s deal re-visited

The battle over state sales tax being collected by on-line retailers like Amazon has now moved to Congress.  Amazon, which this year won a battle in South Carolina receiving a reprieve from collecting sales tax on in-state sales in exchange for building a distribution center in Lexington County, apparently has now switched sides. 

The retail giant is supporting the Marketplace Fairness Act that would strip away the Supreme Court’s Quill decision that said on-line retailers without a physical presence in a state did not have to collect sales tax on purchases in that state.  The sales tax was still owed but it was the purchaser’s responsibility to pay it directly to their state.

If the federal legislation passes, the main opponents now are eBay and Overstock.com, all on-line retailers would be obligated to collect each state’s sales tax and remit it to the proper state.  The bill would exempt retailers with on-line sales of less than $500,000.

All this is good news for the nation’s small brick and mortar businesses that are at a severe competitive disadvantage because they have to charge sales tax but on-line retailers like Amazon do not. 

But passage of the federal legislation won’t appear to help South Carolina’s small businesses until 2016 because the legislation passed this year in the state specifically carves out a sales tax collection exemption only for Amazon to the exclusion of even all other on-line retailers.  Now the constitutionality of that special deal has been called into question.

In yesterday’s issue of Tax Analysts law professors James E. Rogers and Walter Hellerstein provide a scholarly legal assessment of South Carolina’s law regarding Amazon.  They conclude that South Carolina’s law violates the Commerce Clause of the Constitution because it treats certain out-of state on-line retailers (Amazon) different from other out-of-state on-line retailers. 

So even if the Marketplace Fairness Act with its bi-partisan support eventually is enacted, the constitutionality of South Carolina’s law needs to be challenged.  Any lawyers interested?

Unmasking the danger of corporate political campaign funds

Now that Halloween is over and the elections are tomorrow, it is really the time to get scared.  The opinion blog below should frighten the hell out of any red-blooded American.


The Baseline Scenario

Foreign Money, National Security, And The Midterm Elections

By Simon Johnson

Campaign contributions by non-citizens are a huge issue lurking behind the midterm elections; they will be even more important in 2012. Think about the economic dynamics:

1.Americans have a long-standing and well-founded aversion to foreign involvement in their politics, and it is well-established that this can happen in part through corporate “commercial” structures. Thomas Jefferson objected to Alexander Hamilton’s plan for a national bank in part because he feared this would become a stalking horse for the British in some form (see Chapter 2 of 13 Bankers for the context). Dubai Ports World was not allowed to invest in the United States – for reasons of perceived national security. You may or may not think that case was handled well, but we have the CFIUS process to vet foreign direct investment for good reason.

2.The Supreme Court has determined that corporations can make political contributions virtually without limit, apparently not understanding or not caring that (a) management has a fiduciary responsibility to shareholders, (b) globalization means more foreign shareholders on average (for privately held companies and funds, as well as publicly traded companies), and (c) at the margin, key strategic shareholders – the people who provide extra capital when the chips are down – increasingly tend to be foreign. Think about the role of Sovereign Wealth Funds in providing funds to our banking system in 2007-08, or the fact that Citigroup goes cap-in-hand to Saudi Arabia every decade or so.

3.During the Reagan years and again, even more, under the Second President Bush, the US ran a large current account deficit – reaching 6 percent of GDP before the 2008 crisis (and still around 3 percent of GDP). You may think this a technical detail that is largely irrelevant to the political process, but you would be wrong. We finance our current account deficit with capital inflows from abroad or, to put that more plainly: Foreigners buy and hold financial assets in the United States. Some of those assets are US government obligations but traditionally and increasingly non-US people have also acquired claims on corporate entities – including common or preferred stock.There are good economic reasons to allow foreigners to buy financial assets in the United States. We like to invest around the world and a high degree of reciprocity is only reasonable.

The US dollar is the “reserve currency” of choice – for the past 50 years this is where countries and careful individuals have chosen to keep their rainy day funds. This was a core idea behind the international trading system constructed after 1945. You may not like it, but what alternative exactly would you propose?

And there is nothing wrong per se with running a current account deficit – although it would be much better if we used the inflow of foreign capital to finance investment, rather than (as in the Bush years) tax cuts that just further encourage overconsumption.

Irrespective of how you feel about foreign capital inflows in economic terms, you have to face the political reality. As foreigners accumulate claims on the United States, they will increasingly diversify into corporate assets (in fact, this is the advice they get from their Wall Street advisers). Some of these corporate assets explicitly come with voting rights – but those are supposed to be voting rights over the corporation (or investment fund), not voting rights in political elections.

We have effectively enfranchised foreigners in US elections. This is clearly and absolutely not what the drafters of the Constitutions had in mind.

This dissonance between our claimed political values and the political reality will grow over time – unless you think our current account deficit will swing into surplus at any time in the future, the net inflow of foreign capital will continue.

The only way to deal with this is to require complete disclosure by all corporate entities (and similar “veils” like investment funds of any kind) regarding the contributions they make to any organization or individual involved in political messaging or campaigning.

To be sure, this would be onerous. Thomas Jefferson and his colleagues would have wanted it no other way. The US Constitution was not drawn up to protect the rights of foreign citizens. It defines who is and who can become an American – and the rights and responsibilities of those who would like to rule the United States.

And however you prefer to define our legitimate national security interests, how are they consistent with letting foreign citizens influence or even determine the outcome of our elections?