The recent reintroduction of the misnamed Marketplace Fairness Act (MFA) is the latest in the effort to expand taxes on internet sales. Proponents of taxing online sales have been lobbying Congress for almost two decades to let states reach outside their borders and force out-of-state businesses to collect and remit sales taxes to the states into which they sell. Congress should reject the idea.
Currently, a sales tax is only assessed if the seller has a physical presence in the customer’s state. For example, if a Texas company sells cowboy boots to a California resident over the internet, the Golden State can only collect sales tax from the Lone Star retailer if the latter has a store, warehouse, or office in California. That works in reverse too, favoring California retailers in similar circumstances.
This isn’t an arbitrary loophole. It’s the principle of “no taxation without representation” in action. While consumers often have sales taxes passed along to them, it’s the seller who remits the tax, and it’s the seller who’s the legal taxpayer. The seller, not the buyer, is subject to audits and can be held responsible for underpayment by the states in which they do business.
By contrast, the MFA would require sellers to collect and remit taxes to states where they have no political voice. The plan allows states export their tax regimes in order to collect taxes from those who can’t vote them out of office. Taxation without representation was a bad idea at the founding, it was a bad idea 20 years ago, when these online proposals were first introduced, and it remains an awful idea today.
The MFA would break down natural barriers to high taxes by undermining healthy tax competition among states. While it doesn’t create new taxes, the rate of sales tax collection will certainly increase. Taxpayers would experience the MFA as a de facto tax hike.
The legislation would also force online retailers to comply with the requirements of 10,000 distinct taxing jurisdiction — each with its own bases, rates, and exemptions — and remit taxes to the 46 states that impose sales taxes. This presents the danger of regulating small firms out of existence, so it’s no wonder Amazon and big box retailers are lobbying for it.
Proponents make promises of “free” calculating software from state governments, but a study by the group True Simplification of Taxation (TruST) estimates implementation costs of $80,000 to $290,000 and yearly maintenance costs of $57,500 to $260,000 for midsized retailers. Apparently, “free” means something else inside the D.C. Beltway.
The MFA subjects businesses to invasive audits by states where they have no physical presence. Under the legislation, our imaginary Texas retailer could be audited by California, New York, or New Jersey tax authorities simply for selling to someone in one of those states. The MFA does not require states to consolidate audits, so a business could be audited in multiple states simultaneously. That may prove lethal for some businesses.
Proponents of expanding online sales tax collection often invoke images of mom-and-pop stores dutifully paying sales taxes while their e-commerce competitors pay little or nothing. But mom-and-pops are free to add their own online component to their businesses. Today, e-commerce setup services like Weebly and Shopify make it fast, easy, and affordable for Main Street shops to establish an online presence. By comparison, there is nothing fast, easy, and affordable about complying with the MFA.
The drivers behind this push to expand online taxation are states eager to increase their revenue and big box stores looking to eliminate smaller competitors under the weight of greater compliance costs. A vote for against the MFA is a choice between more bureaucracy and higher taxes or more economic freedom. That should make it easy for legislators to reject it for at least another 20 years.
Originally published to The Hill.