While my focus will be on U.S. specifics, I believe that what I have to say is relevant to the Canadian situation because I will focus on what happens when we start to have cross border transactions in the international context and the sources of friction created by sub-national governments in the tax arena.
I believe there are three structural sources of friction that arise out of sub-national taxing power in a federal system.
The first source of friction is the existence of different rules at the national and sub-national level. For example, if you have a different substantive rule as to what creates a sufficient establishment or nexus in order to tax, you are going to have a problem with the administration of inconsistent jurisdictional rules.
The second source of friction is different restraints on sub-national and national behavior. Now, these first two points overlap, but they are different. Let me explain. You can have different sub-national and national rules, which may well be an irritant, but they may not offend any norm of international behavior. You can also have the same rule nationally and sub-nationally, for example, a rule that allegedly discriminates against cross-border transactions for e-commerce, but you might have a restraint at the international level, e.g., a restraint involving national treatment that does not apply at the sub-national level. These are two analytically different sources of friction, although they do overlap.
The third source of friction is that there tend to be more sub-national governments than national governments. The mere existence of a multiplicity of rules itself causes friction.
Those are three sources of friction on which I want to focus.
Hellerstein, Walter, "Roles of States/Provinces in Taxation in the Canada/U.S. Context" (2001). Working Papers. Paper 66.