Internet Tax

Well, it’s semi-official. The Senate has approved the Marketplace Fairness Act. This act, strongly supported by the likes of Amazon.com, would force online businesses to pay sales taxes based on the location of their customer. Supporters say it is critical to bring needed revenue to local and state governments and to protect the brick-and-morter mom-and-pop stores that are losing out to internet sales.

The supporters are also full of shit.

There are innumerable problems with the Act as written and the supposed motivations behind it. First, the Act will stifle tax competition, protecting states with high taxes. Second, the MFA is actually very unfair to online businesses because it imposes gigantic compliance costs on them.

Mr. Enzi’s Marketplace Fairness Act discriminates against Internet-based businesses by imposing burdens that it does not apply to brick-and-mortar companies. For the first time, online merchants would be forced to collect sales taxes for all of America’s estimated 9,600 state and local taxing authorities.

New Hampshire, for example, has no sales tax, but a Granite State Web merchant would be forced to collect and remit sales taxes to all the governments that do. Small online sellers will therefore have to comply with tax laws created by distant governments in which they have no representation, and in places where they consume no local services.

Meanwhile, New Hampshire’s brick-and-mortar retailers will bear no such burden. They will not be required to collect taxes on the many customers who drive across the Maine and Massachusetts borders to shop in New Hampshire. Bill sponsors say it would be too big a hassle to force traditional retailers to ask every walk-in customer where they live, but these Senators are happy to impose new obligations online.

The Enzi plan would require a centralized tax collector for each state or for a group of states that would gather both state and local levies from the online merchants. His office concedes that could still mean 27 or more different auditors of a Web-based business—which is better than 9,600 but hardly qualifies as simplicity.

The Act exempts business with under a million in sales but that’s not really a big exemption (and makes that millionth dollar incredibly expensive; if they tax everything below a million, that’s a marginal rate of several million). No doubt, services will spring up that will allow smaller businesses to simplify the process. But I see no reason why they should be forced to cough up for this services, especially as the services are likely to be provide by Amazon.

Oh, yeah, about Amazon:

For Amazon—the actual target of these laws—[filing state sales tax returns] is trivial. Its staff of crack accountants can probably roll these things out before their Monday-morning coffee break. For a small vendor, however, that’s a whole lot of paperwork. Imagine being a small eBay vendor that has to file a different set of tax returns every quarter or every month, depending on who happened to buy your handmade toaster cozies. The bill makes this slightly easier by exempting the smallest businesses and saying that you only have to file one return per state. But that’s still hours and hours of work per month, for folks who are probably already working pretty damn hard.

This bill, in fact, is good for Amazon—it kills off their small-fry competitors who can’t afford the staff accountants (or the software) to file 46 returns every month. And it frees them up to open warehouses in more states, the better to minimize their shipping costs. Presumably, that’s why they’re in favor of the bill.

It also will likely force more and more businesses to become Z-shops under the Amazon umbrella. It really tells you how mature the internet business model has gotten that the online leviathans are now trying to protect themselves the same way offline ones do: by supporting regulation the destroys the competition.

Let me be clear on one thing: I don’t think internet sales should be completely exempt from sales tax. I do think the retailers have a point (albeit not much of one). Online sellers use the same roads, cops and infrastructure that brick-and-mortar stores do. They should have to pay for it.

So I’m not proposing that internet sellers don’t pay sales taxes. My understanding of the current law is that sales taxes are paid to the customer’s location if the merchant has a physical presence. I’ll revise this if I’m wrong. But wouldn’t a better alternative be to pay taxes to the locality in which the seller resides? If I buy a coat from a seller in Maine, I should pay sales taxes to his local and state governments. It should be the same as if I actually drove up to main or had a friend buy it and ship it for me.

This alternative — taxes based on point of sale — would be everything the MFA isn’t. It would be simple for sellers, requiring zero extra paperwork. It would pay tax money into the governments that are actually supporting the businesses rather than government that are whining about their high-tax regimes. It would create massive tax competition. And it would be straight forward. If the GOP weren’t obsessed with anti-tax dogma, it would be a viable alternative.

I will grant you that my idea does not give Amazon and other large businesses a huge advantage in the marketplace. Nor does it allow them to crush lesser competition. Nor does it allow states to tax without fear. But, unlike all the “fairness” oriented politicians, that’s not my goal.

In any case, this Act needs to go down in flames in the House. While I think innumerable lawsuits will spring up, I think it unlikely the Court will overturn it. The only way out of this potential nightmare is for Congress to act with some common sense.

Crap.

In the end, all you need to know about this act is the title. Any piece of legislation with word “Fairness” in it is bound to be a piece of shit.

Comments are closed.

  1. Ed Kline

    Online sellers use the same roads, cops and infrastructure that brick-and-mortar stores do. They should have to pay for it.

    They already do, it’s called income and business taxes They also individually pay sales taxes in their own states for everything they purchase. Also all the employess for the companies they pay for shipping ( UPS USPS) pay taxes as well. This argument is utter bullshit Hal, you sound like Elizabeth Warren for chrissakes.

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  2. Hal_10000 *

    They already do, it’s called income and business taxes They also individually pay sales taxes in their own states for everything they purchase. Also all the employess for the companies they pay for shipping ( UPS USPS) pay taxes as well. This argument is utter bullshit Hal, you sound like Elizabeth Warren for chrissakes.

    Brick-and-mortar stores pay those taxes in addition to sales taxes. Why should they get an advantage for online business? I do see the point they are making (even if they’re real intentions are otherwise). But if those taxes, ostensibly, are to pay for things we all use — and on the local/state level, they are much more oriented around infrastructure and law enforcement — shouldn’t they be paid based on where the business resides?

    My state taxes are high here in PA (and just went up again). I don’t like them, especially after living in Texas. But I mind them a lot less than I do federal taxes. The share of state taxes that are pure transfer payments is MUCH lower.

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  3. Seattle Outcast

    Tax laws need to originate in the House per the constitution – how is it that the Senate is passing this law before the House has even voted on it?

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  4. Miguelito

    In the end, all you need to know about this act is the title. Any piece of legislation with word “Fairness” in it is bound to be a piece of shit.

    Yep.. the “Marketplace Fairness Act” is right up there with the “Affordable Care Act” that’s helping drive health care costs ever higher.

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  5. Ed Kline

    Brick-and-mortar stores pay those taxes in addition to sales taxes. Why should they get an advantage for online business?

    What, it’s not fair? So is it ‘fairness’ you’re advocating or not? First you advocate that internet businesses should ‘pay’ sales taxes because they use the same infrastructure, then its, well they shouldn’t have an unfair advantage over brick and mortar. Let’s be clear, businesses don’t ‘pay’ sales taxes, they collect them from consumers. This is something you already know, but for some reason you’re phrasing it differently.
    The question becomes ; Should a consumer have to pay state sales taxes for purchases he makes online from a company in a different state, and if so, who is responsible for the collection of those taxes. This question has been already answered. People in states with sales or use taxes are technically responsible for keeping track of those purchases, and paying the appropriate tax. 99% of people don’t do that, and it’s basically unenforceable. While the Supreme Court left the door wide open for Congress to make this type of legislation in Quill v. North Dakota, I am iffy about how a retailer in Hawaii can be held legally accountable for not collecting sales taxes on purchases made by people in Pennsylvania. I find this legislation constitutionally objectionable because it requires businesses located in states with no sales or use taxes ( like Delaware) to adjust their workload ( and therefore costs as well as total sales price) to sell to people in other states. In essence it is a penalty for those businesses, which runs afoul of Article 1, Section 9 No tax or Duty shall be laid on Articles exported from any state.
    Second,

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  6. Biggie G

    Tax laws need to originate in the House per the constitution – how is it that the Senate is passing this law before the House has even voted on it?

    Since there is no federal sales tax, this is not a bill to raise revenue for the federal government. I don’t see this as the constitutional issue for this bill.

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  7. Hal_10000 *

    Miguelito, not to mention the “fairness in broadcasting act”

    Ed, I see your point. And you make a good point about how merchants collect sales taxes, not pay them. My point is that if I drive to Maine and buy something from a store there, I pay sales taxes in Maine. Why should it be different if I, in effect, virtually drive to Maine? In my opinion, the sale is taking place in Maine, where the seller is, not in Pennsylvania, where the buyer is.

    (Counterpoint: some states do impose taxes if you buy stuff out of state. Maryland, for example, because they have high sales taxes on cars, will tax any car you buy out of state too.)

    (I was just about to make another example — buying wine — and then remembered that my state it STILL not in compliance with the SCOTUS ruling that should allow us to buy wine out of state and ship it here. Dammit.)

    Yeah, i just slammed the word fairness and used it again, didn’t I? Mea culpa. The word has become bastardized. What I mean is not fair, but just or equal. That is that buying something in someone’s virtual shop should involve the same punitive taxes as buying it in their physical one.

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  8. RonK

    almost all of the arguments for the internet sales tax a the residence of the buyer are baloney, internet sellers do not cause the same need for infrastructure that a brick and mortar does. think about it, when a new mall/plaza goes in near you or for that matter a big box store how much does it disrupt the area it goes in, think of the new road, or expansion of old ones, what about your property taxes if happen to live nearby, on the other hand the internet only store does not have to have showroom, can be just about anywhere, the only roads it would need are for the trucks to deliverer the good to the warehouse and pick them up to send to the delivery services.

    oh, by the way if this does become law, expect internet sales only taxes, hey we have to make everything fair, the brick and mortar costs are higher (see above)

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  9. Seattle Outcast

    Since there is no federal sales tax, this is not a bill to raise revenue for the federal government. I don’t see this as the constitutional issue for this bill.

    OK, that makes sense. Of course, then the argument of “how is this even something they should care about?” is made. Forcing people to collect taxes for jurisdictions they don’t reside in seems like an odd thing for the feds to be involved in. “regulating interstate commerce” does not seem to me to include “making sure businesses in Arizona collect sales tax for people living in New York”

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  10. Dave D

    Supporters say it is critical to bring needed revenue to local and state governments and to protect the brick-and-morter mom-and-pop stores that are losing out to internet sales

    How come the argument for fairness in taxes and level playing fields INVARIABLY results in the HIGHER tax scenario?

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  11. Screamin

    How come the argument for fairness in taxes and level playing fields INVARIABLY results in the HIGHER tax scenario?

    Ding ding ding! What did he win, Jerry?!

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  12. Xetrov

    “Affordable Care Act” – Makes Small Businesses much less likely to hire more than 50 people even if their market warrants it (I personally know of three successful small businesses who have refused to expand due to this provision), and has resulted in yet more increased costs, with less benefits.

    “Marketplace Fairness Act” – Puts an inordinate amount of required paperwork on hundreds of thousands of small businesses, not to mention the resulting increased costs.

    Is it any wonder that some people think the current administration/congress has no interest in fixing the economy, and/or hates small business.

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  13. Argive

    (I was just about to make another example — buying wine — and then remembered that my state it STILL not in compliance with the SCOTUS ruling that should allow us to buy wine out of state and ship it here. Dammit.)

    From one Pennsylvanian to another: check out wine.com. I’ve used it to ship wine in from out of state before. I think they take advantage of a loophole whereby if you own a vineyard, you can ship wine across PA state lines. Of course, a lot of people here in Philly just drive to Delaware for their booze. Even after you factor in the expensive tolls, buying alcohol in DE can be cheaper than buying it here in PA. I love that PA’s response to that was to institute a use tax and send state troopers to stake out Total Wine.

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  14. Xetrov

    Calling an Internet Tax Bill “The Marketplace Fairness Act” is like calling a serial killer an “Overpopulation Specialist”.

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  15. Dave D

    What is it with liberals and this “fairness” thing? Sorry to repeat myself, but “Fairness” in Liberalspeak means “Increased Taxes” in every case……… LOTS of internet business exists PRIMARILY becase they can offer a cheaper price due to less taxation and less brick/mortar costs, etc. Is this “unfair”?????? I mean, Lowe’s has a nicer store front and facilities than Joe’s Lumber. Should Joe’s Lumber have to pay more because they chose to operate on a different business model than Lowes?

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  16. Miguelito

    Even taxing based on the location of the physical location(s) of the internet seller would be tricky. Do it based on anywhere they have a presence and Amazon will have a shit fit because they’ve got distribution sites all over. Base it on just headquarters location and you’ll find a ton of companies moving to states like NH just to avoid the tax.

    Of course, I think it’s pretty typical that they’re just trying to find a way to tax more for the sake of bringing ever more money into the hands of gov’t (at whatever level) anyway, and would rather they didn’t. I’d almost just prefer a national VAT if it meant getting rid of all the state, county and local taxes to deal with so things were the same everywhere. But I’d bet any VAT would start out huge and only grow over time anyway.

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  17. Jimmigration

    Dormant commerce clause. . . nexus of transaction. . . conlaw. . . skip conlaw to sleep. . .conlaw blah blah blah.

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  18. CM

    Another take.

    Just to take the Cruz argument to its, um, logical end, you should be pretty upset if you live in New York, California or Illinois right now, because you keep afloat dozens of Republican states. New Yorkers pay far more in federal tax dollars than they get back in federal spending. Between 1990 and 2009, taxpayers in New York State transferred out $950 billion to the rest of the country in federal taxes, according to The Economist.

    That money went to keep states like Kentucky, Alabama, West Virginia and Arkansas from further hardship. Still, even though New Yorkers subsidized the states closest to the political values of Ted Cruz, you never heard much complaining about how it’s unfair to support the gun-toting culture of the South, or underwrite its chronic disregard for the poor, the environment and those without health insurance. For that matter, “how is it fair” that tax dollars from Rahm Emanuel’s Chicago are underwriting Lackland Air Force Base in Texas, where dozens of recruits say they were sexually harassed and raped by their instructors?

    Ouch.

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  19. Mississippi Yankee

    salinger, do you or this NYT ass-hat Egan understand the concept of irony?

    Logic, thy name is not Ted Cruz. The very junior senator from Texas is a well-credentialed windbag, with degrees from Princeton and Harvard Law, and a stint clerking at the Supreme Court. After a few months in Congress promoting Ted Cruz, smartest guy in the room, it looks as if he now wants to be Ted Cruz, extremely obnoxious president. But he keeps saying things that make no sense.

    RUSTY!

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  20. hist_ed

    My point is that if I drive to Maine and buy something from a store there, I pay sales taxes in Maine.

    That’s not always the case. In Washington, out of staters don’t pay our sales tax if they come from a state with no sales tax.. The only people who know about this are from Oregon. It’s supposed to be limited to stuff they buy and intend to take back to Oregon.

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