July 17, 2012
One would think that in today’s grim economy, the government would be celebrating Internet entrepreneurs who are growing their businesses, creating new jobs, and increasing consumer choice. But if revenue-hungry states get their way, they’ll turn our nation’s brightest online innovators into a bunch of tax collectors.
At issue is whether a state should be able to force a business located in another state (a so-called “remote seller”) to collect its sales taxes on products destined for that state. To illustrate what’s wrong with this idea, consider a shop on Main Street in Greenville, South Carolina. We would rightly never expect this shop owner to sell something in their store to a tourist from Chicago, add the Illinois sales tax to the purchase price, and then send that tax to the Illinois Department of Revenue. Yet, that’s exactly what proponents of the misleadingly named Marketplace Fairness Act want remote sellers – that are increasingly online retailers – to start doing.
The only thing stopping big-spending politicians from making remote sellers do this is the Constitution and Supreme Court precedent. Retailers cannot be forced to collect sales taxes on behalf of states where they have no physical presence – or what's known as “nexus” in legal circles.
In the 1992 Supreme Court case Quill Corporation v. North Dakota, the Court upheld this clear protection of interstate commerce. It makes sense. States that have sales taxes may use the revenues to pay for roads, sewers, and other government services. Businesses should not have to collect taxes for, and consumers should not owe them to, a state government that provides them no representation or services in return.
Congress and the President would need to give their blessing to upset this status quo.
Make no mistake: the online sales tax would be another unconstitutional mandate. If MFA becomes law, politicians in Washington would give California the right to force a business in another state to collect and pay California sales taxes.
Keep in mind, that all states imposing sales taxes today also have “use taxes” which require their citizens to remit sales taxes owed on purchases they make from out-of-state retailers. But, instead of doing the responsible thing – enforcing their own use tax laws – they would rather have remote sellers do the dirty work of collecting taxes for them.
Supporters claim the MFA is needed to create “fairness” between brick-and-mortar stores and remote sellers, but what they really want is for remote sellers to carry out tax laws mom and pop stores have never had to comply with, namely collecting sales taxes based on the ultimate destination of the product being sold and not based on the location where the sale occurs.
The MFA offends the concepts of nexus, taxation with representation, and tax competition among the states. And that’s just the beginning.
Contrary to what its proponents suggest, the MFA in practice will be anything but simple to comply with and administer.
For example, there is no clear answer on how disputes between a business in one state and a department of revenue in another would be resolved. Also unanswered are concerns about privacy: would a remote seller need to keep track of every customer name, address, and sale and make that information available to state and local governments across the nation if they request it? Supporters of the bill have not addressed these issues.
MFA advocates also claim technology will be able to solve all these problems, but just because a tool may exist to make compliance easier doesn’t make it less objectionable.
No doubt, the Marketplace Fairness Act would be a boon for state auditors, accountants, the tax lawyers’ bar, and software companies, but these are not the supposed victims of the so-called “unfairness” at issue.
Finally, supporters are also quick to point out that the bill, supposedly, won’t hurt small online businesses because it contains a “small seller” exemption. This provision exempts remote sellers from being made tax collectors until they make more than $500,000 of remote sales in a calendar year. The very inclusion of this exemption is an admission by the bill’s authors that their efforts would directly hurt small companies’ growth and that there is indeed pain associated with compliance for small companies.
Moreover, the “small seller” exemption would not apply to existing brick and mortar retailers whose sales revenues are less than $500,000. If the bill is truly about “fairness” there should be no exemption at all. If there has to be an exemption, it proves that it’s not such a great idea.
Should Congress pass this misguided plan, it will almost certainly invite more federal involvement into state tax issues and lead down a slippery slope of further harm to interstate commerce, private enterprise, and consumers.
It will do harm. The question is how much.
If state governments want to collect more taxes from their own citizens, they already have the power to do that. If any retailer wants to embrace the efficiency and nationwide customer base that online commerce offers, that opportunity is just a few clicks away.
Let’s not take that opportunity away. It is not often by doing nothing that Congress can help so much.
Members of Congress should continue to do what has made the Internet the most dynamic and innovative platform for job-creation and growth in the history of man and simply keep their hands off it.
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