Neither Fair nor Equitable: The Marketplace Fairness Act

Published February 15, 2013

In the past few years, members of Congress have proposed several bills to expand states’ ability to tax purchases made online and from mail-order catalogs. Yesterday, U.S. Sens. Mike Enzi (R-WY), Dick Durbin (D-IL), and Lamar Alexander (R-TN) introduced the Marketplace Fairness Act, which expands states’ ability to charge sales taxes on out-of-state retailers regardless of whether the retailer has a physical presence in the state.

Marketplace Fairness Act Opens Door to Vast New State Taxes

Removing the physical presence or “nexus” standard for sales taxes reduces states’ accountability to taxpayers and enables a dramatic expansion of state taxing powers, essentially allowing state taxing authorities to target not just businesses in their state, but businesses nationwide.

Under the Marketplace Fairness Act, states would be given vast new taxing powers over online retailers outside their states, including the imposition of auditing requirements on out of state online sellers and the imposition of tax holidays which may not be relevant in all states. States would be allowed to create their own unique definitions on how and when items are taxed, creating confusion between different taxing bodies.

Supporters of online taxes have argued that these taxes are needed to restore a balance between online and bricks-and-mortar retailers. But the imposition of sales taxes on Internet sales would slow the growth of the e-commerce industry, one of the few sectors of the economy that has seen growth in recent years. John Nothdurft, Director of Government Relations at The Heartland Institute argued in a statement that in reality, the Marketplace Fairness Act would put give brick-and-mortar retailers a distinct advantage.

“The so-called Marketplace Fairness Act is anything but fair for the marketplace. Giving states a new open-ended power to tax out-of-state residents regardless of physical presence would be a disaster for consumers,” said Nothdurft in a statement. “Bricks-and-mortar retailers enjoy many basic advantages over other retailers. Driving up the cost for purchases made online or by mail-order will hinder competition and open taxpayers up to a whole new slew of possible taxes.”

Removing Nexus Standard Anything but Fair and Equitable 

Requiring online retailers to charge a sales tax in states where they do not have physical presence forces consumers to pay a tax to a government with whom they have no political voice and from whom they receive no government benefits or services. 

“Local merchants get roads built to their doors. They get utilities delivered over money-saving public rights of way. They get police, fire, accident, and disaster protection. The states give them all this and much more, and they charge them taxes to pay for it,” argues S.T. Karnick, Director of Research at The Heartland Institute. “Out-of-state retailers get … nothing. But Congress thinks it’s ‘fair’ and ‘equitable’ to force them to collect taxes for the privilege of shipping things to people in these states.”

Bill Switches Tax Burden to Online Retailers and Consumers

Critics of the bill argue that the new rules would place a great deal of the burden of sales taxes directly on the online retailer, while the state is not required to assist in this burden, either by offer electronic filing or funds transfers or by paying any kind of compensation to vendors who collect the sales tax.

Even with today’s technology, it remains difficult for online merchants to accurately charge sales taxes for the products they sell given the 9,600 different taxing sectors in this country. Brick-and-mortar retailers pay taxes based on their physical location, and do not have to face the uncertainty and added costs of collecting and sending sales tax revenue to multiple taxing bodies.

Consumers, who would ultimately bear the burden of the added costs, deserve a tax system that avoids inflating the cost of the products they buy. Bruce Edward Walker, Telecom Policy Advisor at The Heartland Institute believes that the effect of the Marketplace Fairness Act on consumers is an important point which has been widely overlooked by the bill’s supporters.

“What’s left out of the zero-sum equation of proposed ‘fairness’ legislation is the diversity of the clientele respectively served by online and bricks-and-mortar stores – the customers who would wind up either paying more out-of-pocket for online purchases may opt to forgo the purchase altogether until they find the item they desire at a garage or estate sale,” said Walker. “Then what? A new tax that promises ‘fairness’ for both Internet and bricks-and-mortars businesses by taxing the second-hand market?”

Changes to Previous Legislation Fall Short

In order to overcome some of the opposition brought up against similar legislation in previous Congresses, the sponsors made changes to the addressing some of these concerns. The current version added a provision that requires states to provide to remote seller software from certified software providers free of charge that calculates sales and use taxes due on each transaction at the time the transaction is completed and that this software must work for all the states qualified under the Marketplace Fairness Act.

A second change would increase the “small seller exception” from $500,000 in remote sales to $1 million. Critics of the bill argue that the exception is still far too low, effecting many small businesses. Andrew Moylan of the R Street Institute argued in a recent article that the inclusion of the exemption is both inadequate and an admission of the Marketplace Fairness Act’s negative effect on small business.

Alternatives Do Exist

Instead of implementing a tax on out of state consumers, Nothdurft recommends implementing a sales tax system which charges sales tax based on where the product was sold. Under this system, known as an origin-based tax system, both online and bricks-and-mortar retailers would pay the same tax. “If Members of Congress truly want to create a ‘level playing field’ for retailers, then they should support the origin-based tax system that states already use for sales taxes,” commented Nothdurft in a press release. “This would preserve the physical presence standard by having both online and bricks-and-mortar retailers collect taxes based on the location where the product is sold. This would be a much simpler and taxpayer-friendly solution.”

Additional documents and more of The Heartland Institute’s recent work on Internet sales taxes are available on PolicyBot, Heartland’s free online research database, at