Senate Proposed Marketplace “Fairness” Act Limits Personal Freedom, Choice

Freedom Forge Press

Yesterday the US Senate approved its version of the “Marketplace Fairness Act.” The proposed law seeks to require online retailers to collect and pay sales taxes to state and local jurisdictions. On the face of it, it seems like a good idea. After all, shouldn’t individuals buying goods across state lines have to pay sales tax? It’s only fair because if they went to their local store they would have to pay sales tax. Right? People who rudely seek a deal across state lines rob schools, police, and firefighters of their state and local tax funding.

Enter Senators Mike Enzi (R-Wyoming), Lamar Alexander (R-Tennessee), Dick Durban (D-Illinois), and Heidi Heitkamp (D-North Dakota) with the “Marketplace Fairness Act,” which should be renamed the “Free Money from Thin Air Act.”

In the world before the bill, retailers did not have to collect and pay sales taxes on goods sold online to out of state customers. That is, unless, and we are over simplifying here, a) the seller had a physical location in the same state as the buyer; or b) the seller’s state had an agreement with the buyer’s state that would require sales taxes to be collected and paid to the buyer’s state.

The National Conference of State Legislatures (NCSL) is one group lobbying Congress in favor of the law.  According to the NCSL, states lost an estimated $23.3 billion in 2012 alone from their inability to collect taxes on online and out-of-state purchases. $11.4 billion of that figure is estimated to be lost from an inability to tax online sales. To make up for lost revenue, many states passed “sales and use” tax filing requirements. When filing state tax returns, residents would have to report on the amount of goods and services they purchased from outside their home state and pay their state’s sales tax. That attempt was about as successful as starting a fire with two wet sticks.

As a solution, states could opt to step up enforcement on their own residents who were not paying the sales and use taxes.  But we can only imagine how well the voting public would reward their politicians for dumping this increased tax bill on their laps. Plan B would be to impose the tax collection requirements on the seller of the goods and services. This is a more attractive option for politicians because the out of state sellers often have no local representation and no ability to hold politicians accountable for their actions. The only problem to date has been that if the seller resides in another state it is well outside the reach of the clutches of the home state’s taxing agency thanks a Supreme Court ruling that said such taxation was not constitutional unless authorized by Congress,

Enter the Senate with its “Free Money from Thin Air Act,” which if passed by the House of Representatives and signed by the president would provide the very authorization needed to overrule the Supreme Court and permit states to levy taxes on out of state businesses.

And it is only out of fairness (the bill’s name is the Marketplace FairnessAct didn’t you know?!) that states are requiring out of state Internet sellers collect and pay the same taxes as their in-state competitors. The politicians say it’s very unfair for the “bricks and mortar” store to have to inconvenience their customers by collecting taxes when the buyer can order the same item from an out of state online seller and avoid the sales tax. This argument completely overlooks the problem of shipping costs from the out of state seller’s point of view. Many customers have come to expect free shipping from online retailers. So adding a local sales tax on top of a shipping cost will place the online out of state store at a disadvantage. Where is the “fairness” now?

More than once, advocates of the law say, it’s not a new tax, it’s a “due” tax. But if the tax bill hasn’t been collected in the past, it seems like the Senate is expecting the $23 billion to materialize out of thin air–with no impact to consumers. If the issue is state budget pressures, one solution could be to stop dumping unfunded mandates (e.g., Obamacare) onto state budgets. This would relieve the pressure from state budgets without expecting consumers to fork over another $23 billion in “taxes due.”

Of course there’s no reasonable way to comply with the law without some complex tax accounting software. This may explain why Amazon.com made a sudden U-turn from its vigorous opposition to applying state and local taxes to its sales and now supports the law. Trying to find the answer to this reversal and new found friend for politicians doesn’t require much sleuthing. Amazon isn’t looking for tax fairness, it’s looking for customers. Amazon’s convenient new Tax Collection Services offers online merchants a convenient 3% fee for figuring out all that tax mess.  Three percent of $11.4 billion is likely a rich enough potential customer base to come out in support of the new taxing measure.

As usual, Congress, and in this case Democrats and several Republicans in the Senate show an abysmal intelligence of how commerce works outside of their DC dreamland. A few oversights that the Senate made:

1. Complexity. Suddenly, online retailers would be required to have a working knowledge of nearly 9,600 state and local tax laws and regulations affecting everything from different tax rates for different goods and whether certain items are exempted from sales taxes.

2. Enforcement. The bill authorizes state taxing authorities to target online retailers with audits to verify compliance. Businesses simply do not have the financial resources to put into defending and answering auditor’s questions from a variety of taxing authorities.  Not to mention that responding to audits takes them away from much more efficient uses of their time, like running their businesses. The Senate was generous to limit the audits to one from each state. (The Government speak looks like this: “single audit of a remote seller for all State and local taxing jurisdictions within that State”)

3. Ambiguity over what a “State” means. Most people grew up (at least those who were in school since 1959) understanding there are 50 states. This bill extends the “state” definition to include the District of Columbia, Puerto Rico, Guam, American Samoa, US Virgin Islands, Northern Mariana Islands, and “and any other territory or possession of the United States.”

4. Native American Tribes recognized as state taxing authorities. “And any tribal organization (as defined in 18 section 4 of the Indian Self-Determination and Education Assistance Act (25 U.S.C. 450b)).” There are 566 such tribal organizations.

5. What does an “audit” mean. State taxing authorities–to include the 550 new states the Senate found–can engage in all kinds of harassment of businesses without initiating a formal audit.

The bill introduced by Sen. Enzi was supposed to limit a small business’s risk of visits from state tax auditors to one per state. But with final bill markup, a small business is potentially at risk of more than 600 audits with the expanded definition of what a “state taxing authority” means.

The Wall Street Journal reports asking Senator Enzi’s office for clarification on the above issue. When the answer (today!) was that the Senator was still trying to figure out the answer when the bill was passed last night reminds us of the “have to pass the bill in order to find out what’s in it” stupidity started by then Speaker of the House Nancy Pelosi when referring to ambiguity in the Affordable Care Act.

The proposed law serves as another example of Washington ignorance of the private economy. It also illustrates the politicians’ ongoing search for free money at the expense of the freedom of small business owners who operate across state lines. While the search goes ever on and on, 69 Senators waved a magic wand and expected “free money” to come flying out of a magician’s hat. Sixty-nine Senators want you the taxpayer to believe their illusion that they’ve found a cost-free way to fund state and local budgets without harming consumers–ignoring the fact that the money will come from somewhere.

These politicians think they’ve done their part to spread the pain of state and local sales tax in a way that makes the process “more fair” for brick and mortar and online retailers. But they’ve failed to consider a more reasonable alternative–that instead of simply spreading around the tax pain, they could have acted to reduce or eliminate the tax pain by eliminating wasteful spending, ending duplicate government programs, and pretending that unfunded federal mandates such as education, Obamacare, and environmental regulations magically fund themselves