| WE HAVE ADDED to our story about this proposed legislation on
The concept of allowing states to tax interstate commerce is a big and bad idea, in law
and principle. And as is the case with many bad ideas, which are often born of good intentions,
the Devil is in the details, plotting all sorts of mischief.
First off, this is not just a tax for Internet businesses. This proposed law’s stated goal
of ‘marketplace fairness’ is being touted as an effort to level the playing field for local
storefront retailers. Those local businesses may be shocked to find out what ‘fairness’ will
mean for them, as they will have to be in compliance also. When a customer calls a brick-and-mortar
store from out of state, and wants an item shipped to him or her, that local non-Internet
business will also be required to collect some other state’s sales tax. This requires that
store to acquire and integrate into their business procedures the same proposed sales tax
software that this bill promises to provide.
Will the common consumer practice of searching for the most favorable sales tax venue on
big-ticket purchases be outlawed? Consider the case of a consumer who resides in Massachusetts,
and orders from a firm in Arizona, requesting that the merchandise be shipped to Vermont.
Try and define his or her tax venue. It is a common practice today for people to cross state
lines to make purchases in a neighboring state that either has no sales tax, or does not tax
the big-ticket item that the customer is shopping for. Under this proposed law, will merchants
be required to ask for a state ID from their customers, to determine which state’s sales tax
to charge? And what if the customer’s ID is not from the state where he resides? Or resides
only part of the year? The correct answer is important, as the merchant will certainly find
out via 'trial by audit.' Under this proposed bill, a merchant may be audited by virtually
any taxing authority anywhere in the country, who will have regulatory and audit power over
businesses in every state in the US.
And what is to happen to the ‘use taxes’ currently on the books in most states? Unless they
are individually repealed in every state in the Union, you potentially have double taxation
on some sales. This is just one aspect of this proposed law which would require an unprecedented
amount of coordination among the states, each of which has its own local quirks, varied agendas,
and unpredictable political actors.
And to avoid the million dollar sales threshold, will we see the Acme Clothing Company split
itself into the Acme Belt Company, the Acme Shirt Company, the Acme Ballet Shoe Company, and
so forth, each entity staying below the $1,000,000 limit?
This proposed legislation raises many issues of exactly how enforcement and compliance are
supposed to work. They say the Devil is in the details, and we predict that if this law is
passed, the Devil and all his hellish minions will be busy for a long, long time.
THE FOLLOWING is our first article on this subject, which was posted on April 27th:
Bill S 1832 IS
SECTION 1. SHORT TITLE.
This Act may be cited as the `Marketplace Fairness Act'.
SEC. 2. SENSE OF CONGRESS.
It is the sense of Congress that States should have the ability to enforce their existing
sales and use tax laws and to treat similar sales transactions equally, without regard to
the manner in which the sale is transacted, and the right to collect--or decide not to collect--taxes
that are already owed under State law.
SEC. 3. AUTHORIZATION TO REQUIRE COLLECTION OF SALES AND USE TAXES.
(a) Streamlined Sales and Use Tax Agreement- Each Member State under the Streamlined Sales
and Use Tax Agreement is authorized to require all sellers not qualifying for a small seller
exception to collect and remit sales and use taxes with respect to remote sales sourced to
that Member State pursuant to the provisions of the Streamlined Sales and Use Tax Agreement.
Such authority shall commence beginning no earlier than the first day of the calendar quarter
that is at least 90 days after the date of the enactment of this Act.
In theory, most states have ‘use tax’ provisions which require retail buyers who buy from
out-of-state merchants to voluntarily pay a ‘use tax’ to their home state on those purchases.
Of course, few people are aware of, much less pay these taxes. Thus, sponsors of this bill
argue that this is not a new tax, simply the collection of taxes which are already owed.
The bill would be an attempt to override a 21-year old Supreme Court ruling that determined
that catalog retailers do not have to collect sales taxes in states in which they do not have
a physical presence, such as a store or warehouse.
The unintended consequences that would follow should this bill become law are uncountable.
Enforcement and compliance would be a nightmare. And the most entrepreneurial segment of our
economy would be obligated under law to thousands of local taxation jurisdictions.
For instance, in an attempt to minimize the retail seller's confusion, the bill requires
that the states provide software to pinpoint for the retailer the exact sales taxes to be
collected for the various sales tax jurisdictions, of which there are over 9,000 in the US.
Sure, the software will help the retailer determine exactly what items are taxable in each
community, and what each tax rate is, but what if a seller has sales in, say, 500 of those
jurisdictions? Would the internet retailer write 500 checks for sales tax remittals? Or send
500 separate electronic funds transfers? Every year? Every quarter? Every month?
And let's give a thought to the large segment of Internet commerce which is done by retailers
who sell a lot of small ticket items. If a retailer makes a single sale to someone in a certain
town with a tax rate of 6%, and the sale is for $9.95, the retailer then owes that municipality
and state a total of sixty cents. Is that retailer going to have to write a check for 60c,
and then put a 44c cent stamp on the envelope to mail it? Or pay a bank fee to execute a 60c
electronic transfer? And be required to repeat that action 499 other times for all the different
customer locations that he or she sold to that year? At best, this is a lot of time and trouble
for the seller, and a tremendous complication for merchants on the Web. Everything sold on
the Internet under this proposal would become more expensive, by significantly more than just
the added tax amount.
And once these millions of little checks (or that many electronic micro-transfers) arrive
at their destinations, how are most governments supposed to handle this flood of tiny payments?
How will they absorb the costs of the extra clerks that would have to be hired just to process
and monitor them? And assuming a normal level of municipal and state efficiency, does anyone
believe that these government entities can receive, process, and credit these payments accurately,
without the additional administrative costs actually exceeding the amount of taxes collected?
The bill as written contains an exemption for Internet sellers with gross sales of less
than a million dollars a year. Of course, savvy Internet shoppers will want to buy 'tax free'
by dealing with businesses below that threshold.
Because of the exemption for retailers with annual sales of less than a million dollars,
in effect the "Marketplace Fairness Act" would create a two-tiered price structure
for Internet retailing – non-taxable sales by the ‘little’ sellers, with administrative burdens
and tax disparities for the larger companies. It may seem fair, in a populist sort of way,
to skew the rules in favor of the little guy (small sellers), but it discriminates against
the successful - those firms that may have, for instance, 5 to 100 employees, and have sales
over a million dollars annually. For the most part, these businesses have grown that large
(although not Amazon.com large) by offering favorable prices and good customer service.
Having an Internet retailer collect taxes for these myriad different tax authorities would
legally make that retailer subject to audit by any of them. Practically speaking, what are
the rights of a retailer who has to answer to tax authorities in 45 states, Guam, Puerto Rico,
the Marianas Islands, and over 600 tribal American Indian districts? Let's say there's a disagreement
or clerical error involving taxes due, and a taxing authority a thousand miles away sends
an Internet merchant a notice of deficiency for $381.79, or $38.17, or $3.81. What can that
seller do? You can’t hire a lawyer, or even travel by airplane in person, to appeal those
sorts of sums. Sure, the big outfits like Amazon.com have the sales, profits, accountants,
and in-house attorneys to take care of such disputes, but most Internet entrepreneurs do not.
It cannot be said that any Internet business would have any practical 'rights' in such disputes,
originating as they might from any of 9,600 different tax jurisdictions.
In short, it is the small to medium size businesses which would be crushed by the overwhelming
burden involved in complying with this ill-considered piece of legislation. Should it become
law, the large middle tier of Internet businesses would be crippled or eliminated entirely.
The only businesses not affected would be the smaller 'exempt' mom-and-pop outifits, left
to compete with corporate behemoths like Amazon and Walmart.
There are numerous good reasons why the taxing of interstate commerce has been forbidden
since the beginning of the Republic. This bill seeks to overturn that sensible prohibition,
yet is being described as an effort to simply "restores states sovereign rights." Of
course, the 'right' hinted at in that disengenuous description is the 'right ' of states to
collect use taxes. The obvious question is - Why don't they collect them already? Because,
it's hard. For decades, states have been unable to find a way to collect the phantom use tax,
but they did find friends in Washington who are willing to support an effort to make businesses
in other states do all the work.
This bill would complicate, hinder, and upset Internet commerce, the fastest-growing segment
of our whole economy, and one that now provides American consumers with a variety of choices
and pricing power that 20 years ago could not even be dreamed of.
The patently unfair 'Marketplace Fairness Act' was passed in the Senate on Monday May 6th
by a vote of 69-27. On the other side of the aisle, the House of Representatives is likely
to be more skeptical. This would be a good time to write or email your Representative in Congress
with your opinion on bill S 1832 IS.
-Richard Smith, April 27th 2013, revised May 4th and May 7th.