Economist Laffer Backs Internet Tax; Opponents Fear Precedent

Published July 22, 2013

Economist Arthur Laffer has released a study claiming a measure requiring online and catalog retailers to collect and remit sales taxes regardless of where their customers are located is a pro-growth, pro-jobs economic policy.

The Marketplace Fairness Act, more commonly known as the Internet sales tax, has already passed in the U.S. Senate and awaits action in the House. The Laffer study addresses the online sales tax “loophole” and “how enacting policies to close it will jumpstart economic growth across the country.”

Skeptics toward Laffer’s conclusions abound, including Katie McAuliffe, Federal Affairs Manager at Americans for Tax Reform and Executive Director of Digital Liberty. She says there is no online sales tax loophole.

Taxing Beyond Borders

“All businesses collect and remit sales tax for sales made within the states where they are physically present. States have a use tax which they have not adequately tried to collect,” said McAuliffe. “Sure, people who shop online will see their taxes go up, but that is not the biggest problem. The major issue is the precedent this legislation sets for states to tax beyond their physical borders.”

McAuliffe said states would “use this precedent to justify claims to business activity taxes, business income taxes. That’s where the real money is. And once this starts up, you better believe that state regulatory agencies will begin pushing their regulations across borders too.” 

Currently, under a longstanding “physical presence standard,” states can force only businesses that have a physical presence such as a store, factory, or warehouse within their borders to collect sales tax. The Marketplace Fairness Act would overturn the physical presence standard and force out-of-state businesses to collect tax and remit sales tax to whichever state customers are located.

Implications of MFA

In a USA Today article on his report, Laffer wrote, “lawmakers need to come to grips with our subpar economic performance and enact reforms to jumpstart growth.”

However, a joint memo signed by more than 50 other business and public policy leaders argues the MFA would impose “added costs for retailers and American consumers, directly through the sales taxes imposed, but also through the added burden of collecting the taxes for the 9,600 separate taxing jurisdictions in the U.S., each with its own unique definitions, holidays, and rates.”

Laffer’s study notes that since the MFA would permit states to impose their sales tax rules and regulations on e-businesses outside their borders, states would receive more sales tax revenue. Laffer suggests the extra revenue could be used to reduce other taxes such as state income taxes. At least three governors have pledged to cut other taxes if their states collect sales taxes from out-of-state retailers. But legislators, not governors, set tax policies, and nothing in the MFA bill requires tax cuts to offset additional sales tax revenue from Internet shoppers.

Fairness at Issue

In his study, Laffer writes, “it is not only fair to level the playing field for our local small businesses … but a crucial step towards greater growth and job creation through lower tax rates across the board.”

There is nothing “fair” about the Marketplace Fairness Act (MFA), said Seton Motely, president and CEO of Less Government, an organization whose name describes its aim. Motley is also editor in chief of

“This bill does not achieve tax collection uniformity,” he said. “It would only [do so] if it required every brick-and-mortar store to ask every single one of its customers in what city, county, and state each lives, and forced the store to collect those taxes and remit.”

The Marketplace Fairness Act requires this only of online, telephone, and catalog retailers. He describes this as “an absurd uber-burden that should never be imposed—and never asked for by anyone who claims to be for a low-tax, low-regulation marketplace.”

Motley also notes online sales represent only approximately 10 percent of total retail sales.

“This is Big Business rent-seeking on parade, where they use the regulatory hammer of government to crush their competition—smash them in the crib before they grow into real, actual competitors. This isn’t parity; it’s pathetic,” said Motley.

Issue of Federalism

Laffer writes in the report, “so-called e-fairness legislation addresses the inequitable treatment of retailers based on whether they are located in-state (either a traditional brick-and-mortar store or an Internet retailer with a physical presence in the state) or out of state (again as a brick-and-mortar establishment or on the Internet).”

Motley points out, though, that states have different tax policies in many areas. Saying it is “inequitable” for there to be different tax policies in different states is an alternative way of describing federalism, which is something that should be encouraged.

Marketplace Fairness Act supporters have predicted an additional $23 billion annually would be collected if the bill becomes law. But McAuliffe said she expects revenue would fall well below the estimate, because they (and Laffer) are not taking into account that the majority of online sales tax is already collected and remitted.

The MFA “is not going to be much of a revenue source for states. It’s not federalism. And it’s not sustainable,” McAuliffe said.