Heartland Institute Joins Free-Market Coalition against Internet Sales Tax

Published September 18, 2014

A broad coalition of conservative leaders and free-market proponents has signed “An Open Letter to the United States Congress: Oppose the Marketplace and Internet Tax Fairness Act,” voicing opposition to S. 2609, the so-called Marketplace and Internet Tax Fairness Act.

The leaders of seventeen organizations, representing millions of citizens, called the legislation “confused,” saying it combines a commonsense extension of the national ban on state legislatures’ efforts to tax internet access with “highly unpopular and misguided legislation to grant states cross-border tax authority for businesses located outside their jurisdiction.”

Dueling Bills

Heartland Institute President Joseph Bast and other signatories of the letter expressed support for making permanent the ban on state efforts to tax the internet, stating provisions in the bill would dismantle proper limits on state tax collection authority while causing serious damage to electronic and interstate commerce. 

In July the U.S. House of Representatives voted to enact a ban on Internet taxation, by amending the Internet Tax Freedom Act, which expired November 1. However, a bipartisan group of senators led by Sen. Mike Enzi (R-WY) attached a revision of a 2013 online sales tax measure, the Marketplace Fairness Act, to an alternative 10-year extension of the Internet Tax Freedom Act, setting up a potential showdown between the House and Senate regarding the legislation in the lame duck Congress.   

Opponents of the Marketplace Fairness Act say it would eliminate the “physical presence standard” currently shielding consumers from tax collectors in other states, protecting small businesses from having to deal with a dizzying maze of state and local tax laws.

Changing Meaning of Nexus

Under existing federal law, states cannot force businesses to collect sales taxes from customers in states where they do not have a “nexus,” a physical presence such as a warehouse, office, or distribution center. As a result, most online retailers do not bother charging sales tax for purchases made by out-of-state customers.

Instead, most states leave it up to customers to report their online purchases from other states, trusting them to pay the applicable use taxes. About a dozen states, trying to capture what they view as lost sales tax revenues, have expanded the definition of “nexus” to include affiliate programs—the so-called “Amazon tax”—but the majority of online purchases are still either untaxed or collected at the discretion of online purchasers.

Entrenched brick-and-mortar companies argue this arrangement gives online retailers an unfair advantage, and state governments complain about lost tax revenues from out-of-state purchases.

The Marketplace and Internet Tax Fairness Act would allow states to force businesses to charge a sales tax to out-of-state customers. Businesses with gross annual receipts of more than $1 million could be forced to account for nearly 10,000 different state and local tax jurisdictions and rules, depending on the location of each customer.

Red Tape Run Amok

The open letter to Congress opposing the proposed law states, “imposing this unworkable collection standard on remote retail sales, but not brick-and-mortar retail sales would not only be unfair, it would result in enormous complexity while damaging interstate commerce.” 

The letter goes on to note the proposed law would create substantial compliance burdens and the small-seller exception would do little to mitigate the damage. 

The letter’s signatories concluded, “in seeking to address the failures of the ‘use tax’ systems employed by states, the ‘Marketplace Fairness Act’ ends up giving a federal blessing to a massive expansion in state tax collection authority, the dismantling of a vital taxpayer protection upon which virtually all tax systems are based, while harming a segment, that, despite its dramatic expansion, still only accounts for roughly $0.07 of every $1 in retail spending.”

Currently, S. 2609 remains under consideration by the United States Senate, where it has received two readings.

Paula Bolyard ([email protected]) writes from Doylestown, Ohio.

Internet Info:

“Open Letter to the United States Congress: Oppose the Marketplace and Internet Tax Fairness Act,” http://heartland.org/policy-documents/open-letter-united-states-congress-oppose-marketplace-and-internet-tax-fairness-act