Congress and The Internet Sales Tax: Whatever Happened to Marketplace Fairness?

A couple of days ago, the Senate passed the Marketplace Fairness Act (S. 743), which essentially allows for local and state entities to collect sales taxes on the Internet. Whether the Republican-dominated House will pass the bill is another story entirely. In any case, the idea behind the bill is to close the Internet as a tax loophole and provide a tax revenue of an estimated $23.3B per annum (although that number might be as low as $4B) to help compensate for budgetary shortfalls, which would explain the 69-27 bipartisan vote. Although I am all for minimizing tax exemptions and simplifying the tax code, I have to wonder whether enacting an Internet sales tax in its current legislative form is as sound of an idea as it seems, especially when done in the name of fairness or the government attempting to "level the playing field."

Under existing tax law, the buyer is the one who owes the sales tax. However, due to a Supreme Court ruling (Quill Corp v. Heitkamp [1992]), an individual state cannot compel the collection of taxes of citizens of other states unless the retailer need to have a physical presence in the customer's state. This ruling applies both to traditional retailers and online retailers. Instead, the customer is supposed to submit the sales tax directly to the government (How many people even knew that this was required under law?). It makes sense that state laws should only apply to things that take place within that state. Why force a business to pay a tax to a government in which they have no political voice or representation?

What the Marketplace Fairness Act would do is require online and other remote sellers with annual sales over $1M (so much for factoring in profit margins) to collect the sales tax and send it to the appropriate tax jurisdiction. What this means is that the seller would have to ascertain the purchaser's location, find the appropriate tax rules and regulations for that location's given tax jurisdiction, collect the tax, and submit it to that distant authority.  

Under the Marketplace Fairness Act, this level of compliance would only apply to online and remote sellers. No brick-and-mortar establishment would be required to process all of this for its in-store sales, yet online retailers would have to do so for its remote sales? Where is the fairness in that? This will only discourage online retail. Also, given that there are 9,600 sales tax jurisdictions in the United States, can you imagine the compliance costs, as well as the bureaucracy, red tape, and tax audits (Section 2 of the Act) a small or medium-sized business would have to endure? How will driving up the cost of doing business help economic growth? It's not as simple as "simplifying sales tax laws" or using a "streamlined" computer program. Categorizing goods and services across multiple tax codes is anything but simple: just take a look at this example here.  

A few other miscellaneous points to consider:

• If this is about "protecting small business," why is it that Amazon and Wal-Mart are the most ardent supporters? There is a reason for this: they can handle the burden, whereas the extra burden on their smaller competitors would either cause them to adversely restructure the way they do business or even lay off employees. 
• Since the bill provides more opportunities for private information being lost, I am worried that the passage of this bill can cause an erosion of privacy. Is anyone worried that the government would be privy to an unprecedented amount of consumer data?
• From a customer's standpoint, isn't it possible that shipping costs can offset a sales tax? Shippers have to pay fuel and transportation taxes because of shipping. Also, people don't buy goods online to avoid sales tax. They do so because of price and availability. Many goods online are cheaper, even before sales tax.
• Mom-and-Pop stores are not at a disadvantage because of online commerce. If anything, more brick-and-mortar stores have an online presence due to better inventory management and simplification of ordering necessary outputs for final goods.
• Rather than strictly focus on revenues, shouldn't states be focused on general budget reduction?
• This bill is about forcing out-of-state merchants to act as deputy tax collectors. If a state with high taxes (e.g., California) can collect a sales tax from a state without a sales tax (e.g., Montana), this distorts incentives created by taxation. If a high-tax state refuses to adjust its tax policies, a business or individual can move to another state. However, with this bill, it would give high-tax states the right to impose their bad tax policies extraterritorially. Another way of putting it: instead of competing to lower taxes and attract businesses, states will be competing to to see who can impose the highest level of taxation on citizens in other states.     

While there should be tax reform to simplify the collection of sales tax, as well as making sure that Internet transactions have the applications of sales tax as brick-and-mortar businesses by implementing an origin-based sourcing rule, let's not delude ourselves in thinking that the Marketplace Fairness Act is actually about fairness; it's about imposing undue burdens and regulations on small and medium-sized businesses while enlarging government power.