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The Marketplace Fairness Act is More Unfair Than Status Quo

The advent of the internet has simplified life for millions of consumers in this country.  But for state governments, many of which are hungry for more tax revenue to purvey their rapacious welfare states, e-commerce has complicated their ability to collect all sales taxes owed to the state – at least without directly taxing the consumer, something the statists are too scared to do.

Most states have been collecting sales taxes for over 50 years – long before the internet was invented.  The tax was structured so that the seller would automatically collect the tax from the buyer on behalf of the state.  Many jurisdictions have multiple layers of sales tax – some of them collecting city, county, and state taxes.

In theory, online retailers should function no differently than their brick and mortar counterparts.  An online retailer based in California should collect sales taxes from its costumers on behalf of California.  However, because the consumers are the ones who owe the tax, not the retailers, online retail companies would be forced to collect taxes for other states.  The Supreme Court has already ruled in Quill v. North Dakota that an individual state has no power to directly tax or compel tax collection of citizens of other states.  A business must be physically located in a state in order for that state to require it to collect sales taxes on the state’s behalf.  This 1992 decision took place long before e-commerce became a factor in the economy.

Some conservatives who are pushing a federally-mandated internet tax claim to be bothered by a question of free market fairness.  After all, isn’t the current sales tax system tendentious and beneficial to online retailers who could offer the same products to consumers as brick and mortar stores without having to charge sales tax?

Let’s first acknowledge that far from crushing mom and pop shops, the internet has actually leveled the playing field for them.  The internet has allowed smaller businesses to compete everywhere, even if they lack the capital necessary to build a national network of wholesalers, distributors, and retailers like the Walmarts of the world.   As for collecting taxes, there is no good way of collecting e-commerce sales taxes across state lines without growing government, creating even worse market distortions, and hurting low-tax red states.

The solution that is being pushed by companies like Walmart, revenue-hungry governors, and those who claim to be concerned about the free market, is the Marketplace Fairness Act (S.336/H.R. 684).  Yes, that’s a real conservative sounding name.  The bill would essentially allow states to join together to force online retailers to collect sales taxes on behalf of all 50 states based on the location of the shipping address.

To the extent that the status quo gives an advantage to online vendors, the MFA would overcorrect the problem and hurt online vendors.  While brick and mortar stores are forced to collect taxes from everyone, they are only subject to the tax of their home state.  So if they are located in a state with no sales tax or a low tax they collect the lower tax, even if the customer is from a high tax state.  Under the MFA, online vendors in a state like New Hampshire would still have to collect the high rate of taxes of customers from California.  So red-state companies will have to serve as tax collector for high-taxed blue states, thereby obviating the benefit of being in a red state and blurring the effectiveness of laboratories of democracy.

Moreover, why would we want to encumber online businesses with the technicalities of establishing a tax collection system that would satisfy nearly 10,000 unique tax jurisdictions in this country?  Hence, whereas under the current system brick and mortar businesses have to collect more in taxes, under the MFA online vendors in red states would pay even more, plus they would incur the cost of the new regulatory burden of complying with the myriad of tax codes.  That is a recipe for killing jobs and raising the cost of goods.  It’s for good reason that the Quill decision referred to such a scheme as a “burden” and violation of due process.

In fact, collection, enforcement, and reciprocity of this tax would be so complicated that it would engender yet another fix in the endless cycle of government incompetence.  The only way to effectively collect it would be with a uniform national sales tax.  There is no question in my mind that the MFA would be the easiest way for liberals to leverage their much sought-after national sales tax – an entirely new revenue stream.

More broadly, why would we ever push for new revenue and a new stream of taxation that will totally disrupt e-commerce?  Let’s find ways to lower the tax burden on brick and mortar stores instead of raising them on online vendors.  Yes, technically the tax is already there, but because it is never collected for practical reasons, it is ostensibly not there.  Why open up the spigot when we are trying to turn it off?

The governors pushing this couldn’t care less about the free market argument; they want new revenues instead of cutting wasteful spending and state welfare programs.  The only way to deal with the inherent unfairness to brick and mortar stores would be to have online retailers collect the sales tax from all costumers just on behalf of the retailer’s home state.  That would definitely be more practical, less cumbersome, and beneficial to low tax states, many of which would be quite eager to attract online retailers to their respective states.  However, such a plan would completely change the sales tax from a tax owed by the buyer to one levied directly on the seller.  Besides, why should we open up any new stream of revenue when we should be lowering the tax burden on everyone?

The reality is that although states can’t collect a sales tax form citizens of the other states, most states require you to pay a “use tax” and report how much you bought in internet purchases that year and then tax you for it.  Of course, most people don’t report anything.  So why don’t states just enforce the use tax?  Because they would rather have an arrangement in which other states would collect it so that the disquiet over higher taxes would not be directed at them.  They want the revenue but are too cowardly to ask for it the old way.

Cross-posted from The Madison Project

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