Texans Should Beware of Internet Sales Tax

Texas is one of the nation’s best states for doing business, according to a recent CNBC survey. Lone Star lawmakers deserve credit for the pro-growth environment they’ve helped foster. But a bill now before the U.S. House of Representatives threatens this happy progress.

The Marketplace Fairness Act (MFA) would expose Texas to businesses taxation without representation from other, potentially less business-friendly states. It would empower state governments to reach across their borders and tax other states’ businesses.

Currently, a sales tax is only applied to online purchases when the seller has a physical presence in the state where the buyer resides. For example, when a customer in California buys something from a Texas retailer, the purchase is only subject to tax if the company has a store or warehouse in California. The Marketplace Fairness Act would remove this physical presence requirement, and thus subject businesses to the tax policies of other states where they have no political voice.

The legislation will be costly at best and lethal for jobs and small businesses at worst. It will force online and mail-order retailers to calculate for 10,000 distinct taxing jurisdictions, each with its own bases, rates and exemptions and to remit accordingly to 46 states and 550 tribal organizations. Proponents make promises of “free” calculating software from state governments, but a recent study by tax simplification group TruST estimates implementation costs of $80,000 to $290,000 and yearly maintenance costs of $57,500 to $260,000 for midsized retailers.

Additionally, businesses will be subject to audits by states where they have no presence. Under the legislation, a retailer located exclusively in Texas could be dragged into an audit by California, New York or New Jersey simply because someone there bought from the retailer’s website. And the MFA does not require states consolidate audits or respect audits conducted by other states, so a business could be audited in multiple states simultaneously.

Businesses have chosen to locate in Texas expressly because of its pro-growth policies. Allowing aggressive tax-and-spend states to reach into Texas and tax its businesses largely negates the competitive advantage the state affords. That’s bad news for business owners, job seekers, and elected officials working to implement sound economic policy.

The MFA would also set a precedent that should worry every taxpayer. If the physical presence requirement no longer holds for sales taxes, what area of taxation policy is next? The expansion of state tax authority found in the MFA will embolden states to keep pushing the limits of what’s taxable and where.

It’s not as if revenue-hungry states need any encouragement — New Jersey has seized trucks passing through their jurisdictions, demanding corporate income taxes in exchange for their release. And some businesses are afraid to send employees to New York, lest that create a tax nexus, leading to tax bills for thousands of dollars.

Just as no one should be allowed to vote outside one’s own jurisdiction, a state’s power to tax and regulate should end at its border. Anything else is taxation without representation.

The modest revenue gains of the MFA scheme simply don’t justify all the pain. And there are better ways to address any inequities in how sales are taxed online. For instance, an origin-based approach would access tax at the point of purchase — just as it is in the brick-and mortar world — and require retailers to report only to their home tax authorities. In doing so, it would limit states to taxing only those to whom they are politically accountable.

Politicians should not bend to the siren sound of increased tax revenues without considering the ramifications to their business constituents. The Marketplace Fairness Act should be rejected by Texans who want to keep their state attracting businesses and its economy growing.

Melugin is an adjunct fellow with the Competitive Enterprise Institute, a free-market think tank in Washington, D.C.