Voters Aren't Buying the Internet Sales Tax Scheme

The misleadingly named 'Marketplace Fairness Act' is flopping with lawmakers and voters.

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On "Cyber Monday" Rafael Moreno gets packages ready for shipping at the Amazon.com 1.2 million square foot fulfillment center Monday, Nov. 26, 2012, in Phoenix. Americans clicked away on their computers and smartphones for deals on Cyber Monday, which is expected to be the biggest online shopping day in history. Shoppers are expected to spend $1.5 billion, up 20 percent from last year, according to research firm comScore. That would not only make it the biggest online shopping day of the year, but the biggest since comScore started tracking shoppers' online buying habits in 2001.

It's not too hard to tell when supporters of politically and publicly unpopular legislation know that their pet project is in trouble – just read their press releases.

A case in point is the misnamed "Marketplace Fairness Act," a bill that would give the federal government's blessing for a scheme allowing tax authorities to reach across their borders and demand sales tax collections from out-of-state businesses. The bill, which passed the Senate earlier this year, is being peddled by an alliance of revenue-hungry state officials and large traditional retailers. The latter group hopes to saddle their competitors (mostly Internet-based sellers) with unique and heavy costs of complying with this complex system.

Fortunately, the House of Representatives is taking its responsibilities more seriously than the Senate, which seemed to ignore the bill's key flaw: destroying U.S. constitutional safeguards that have (so far) generally protected taxpayers living in one state from the predatory policies of another. Recently, House Judiciary Committee Chairman Bob Goodlatte, R-Va., announced that his panel's consideration of the Internet sales tax issue would be guided by seven pro-taxpayer principles, which my organization has lauded.

[See a collection of political cartoons on the economy.]

Strangely, the Marketplace Fairness Act's supporters were effusive over the principles as well. The National Governors Association, for one, chose to "praise the chairman's efforts to move this legislation." The National Retail Federation was a bit more guarded but put on a brave face and was still "confident that Congress will address the unlevel playing [field] this legislative session."

Set aside for a moment that Goodlatte himself has expressed many concerns about the bill's flaws in the first place. By any fair comparison, it fails to meet any of the criteria set forth in those principles, quoted here:

  • "Tax Relief – Using the Internet should not create new or discriminatory taxes … Nor should any fresh precedent be created for other areas of interstate taxation by States." Whatever intent Congress expresses in the Marketplace Fairness Act, once it gives governments the power to collect taxes on multi-state Internet sales, the door could be open for similar attempts with income and other types of taxes.
    • "Tech Neutrality – The sales tax compliance burden on online Internet sellers should not be less, but neither should it be greater than that on similarly situated offline businesses." The bill demonstrably imposes a greater collection burden on Internet sellers, requiring them to keep track of sales tax laws in every place where their customers reside. Brick and mortar retailers collect for one place, where they're based. There are more than 9,600 sales-tax entities in the U.S. today.
      • "No Regulation without Representation." The bill  would subject online retailers to the auditing and compliance procedures of agencies in other states, where they would have no vote or other meaningful ability to participate in the political process.
        • "Simplicity – … laws should be so simple and compliance so inexpensive and reliable as to render a small business exemption unnecessary." The bill does contain such an exemption; though paltry, it is a blatant admission that coping with the legislation would not be simple for "Mom and Pop" e-tailers.
          • "Tax Competition – Governments should be encouraged to compete with one another to keep tax rates low." By enabling states to force businesses located outside their borders to submit to their own sales tax regimes, the Marketplace Fairness Act would give governments throughout the nation less incentive to keep tax policies moderate. After all, if California (with state and local rates often exceeding 8 percent), could tell a firm in Maine (with a rate of 5 percent) to remit tax proceeds from sales to Golden State consumers, California need not worry so much about businesses fleeing its environs for better treatment.
            • "States' Rights – States should be sovereign within their physical boundaries." See above – how could Maine (or any other state) claim sovereignty over its fiscal policy under the tax-collection apparatus the bill would permit?
              • "Privacy Rights – Sensitive customer data must be protected." The multi-state auditing procedures necessitated by the Marketplace Fairness Act's tax collection structure would mean more opportunities for such data to be swapped, divulged … and potentially compromised.
              • [See a collection of political cartoons on the budget and deficit.]

                Hard questions like these are tough for the bill's proponents to answer, but for their part the American people have made up their minds – they're not buying into the legislation. In June, a Gallup poll reported 57 percent opposition to an Internet sales tax like that contained in the Marketplace Fairness Act. A month later a poll of 1,000 likely voters commissioned by National Taxpayers Union and R Street Institute found the same 57 percent number, with skepticism across broad demographic and political groups. But the latter survey dug deeper and unearthed other interesting trends.

                One question tested respondents' familiarity with current law, namely that "online retailers are only required to collect sales taxes from customers in states where they have a physical presence." More than 61 percent of respondents correctly pegged this statement as true, while barely more than 18 percent answered false.

                Further, when respondents were informed "the proposed legislation would allow tax enforcement agents from one state to collect taxes from online retailers based in a different state," the margins against it hardened to 70 percent. The likely voters were even presented with pros and cons of the bill's approach:

                • Support because their "state should be able to generate more revenue" or oppose because "it enables other states to interfere with the laws and will of state voters";
                  • Support "because all purchases should be treated the same" or oppose "because it opens the floodgates to more government regulation and taxation of the Internet";
                    • Support "because all purchases should be treated the same" or oppose "because it gives an unfair advantage to large retailers."
                    • In each case, the opposing argument won by 2:1 margins.

                      Given these poll results, the opposition of nearly every major free-market organization, and the practical difficulties of meeting even one of Goodlatte's seven principles, it's not just that the Marketplace Fairness Act's time has come and gone. Indeed, that "time" may never have been here in the first place.

                      Pete Sepp is executive vice president of the National Taxpayers Union (ntu.org).

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