Tag: Electronic commerce

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.


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.