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Internet Tax Bill Would Allow Taxation Without Representation

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Internet Tax Bill Would Allow Taxation Without Representation

New Study Outlines Harmful Consequences of Marketplace Fairness Act

Washington, D.C., July 30, 2012—--This Wednesday, the Senate Committee on Commerce, Science and Transportation will hold a hearing on the Marketplace Fairness Act (S. 1832), a bill that would allow state governments to collect sales taxes from out-of-state retailers. The House Judiciary Committee held a hearing on counterpart legislation last week.

Today, the Competitive Enterprise Institute (CEI) released a study by Policy Analyst Jessica Melugin on the harmful consequences of the new tax plan proposed by the Marketplace Fairness Act. Melugin argues that the bill would decrease tax competition between jurisdictions, unduly burden both sellers and consumers, and—--perhaps most importantly--it would violate an essential tenet of American governance: no taxation without representation.

Under current law, a state may not collect sales taxes from retailers who have no physical in-state presence. This ensures that businesses are taxed only by the states where they are located. But brick-and-mortar retailers say the current system unfairly incentivizes consumers to purchase tax-free goods online from out of state.

In her study, Melugin explains how the Marketplace Fairness Act would legitimize a de facto state tax cartel. But Melugin admits that brick-and-mortar retailers have a point. "“There certainly are inequities in the way online sales are taxed,"” she writes, “"but in the case of S. 1832, the cure is worse than the disease."

In place of the Marketplace Fairness Act, Melugin proposes an origin-based tax system in which all sales tax rates are assessed for the seller's principal location. An origin-based approach would:

• Address the “fairness” issue by ensuring that online, catalogue, phone, and yet-to-be-invented sales platforms all will be treated the same as purchases on Main Street;

• Help preserve federalism and put downward pressure on taxes;

• Place a very minimal accounting burden on retailers, who would only have to calculate and remit the taxes applicable to their principal place of business;

• Preserve consumer privacy, since the tax calculations would be based on the seller’s location only; and

• Keep political authorities accountable to those they tax, namely, businesses in their own jurisdictions.

>> Read Jessica Melugin's full CEI OnPoint: "The Marketplace Fairness Act Would Create a State Sales Tax Cartel and Hurt Consumers."

For more on this issue, see:

• Jessica Melugin’s testimony on the House bill, The Marketplace Equity Act of 2011

• Melugin’s May 2011 op-ed in The Washington Times: “State Cartel Looking to Hike Internet Taxes”

• Melugin’s April 2011 op-ed in The San Jose Mercury News: “An Alternative to California Proposal to Tax E-Commerce