Should the House Pass the Marketplace Fairness Act?

Published December 16, 2013

Congress has considered many bills over the past few years that, like the Marketplace Fairness Act, would expand states’ ability to force out-of-state retailers to collect sales taxes regardless of whether the retailer has a physical presence in the state. Imposing such a tax on online and mail order sales would hurt the online economy, hinder tax competition among the states, raise far less revenue than legislators expect, and worst of all, open up taxpayers to a slew of new possible taxes. The Marketplace Fairness Act would constitute a big tax hike for shoppers.

Currently, taxpayers pay and retailers collect sales taxes based on where the seller is located; this is referred to as an origin-based tax system. The Marketplace Fairness Act would impose a different set of rules on online retailers by forcing them to collect taxes based on where the consumer is located and then remit those taxes back to that state. This taxing model, commonly referred to as a destination-based tax system, taxes online and bricks-and-mortar stores differently, even when they sell the same item, creating an unequal and unfair situation.

It is no surprise that the majority of the American public oppose taxes on Internet purchases. A Gallup poll conducted earlier this year found 57 percent of respondents opposed enacting a law that would force online sellers to collect sales taxes for other states, as the Marketplace Fairness Act would do.

Despite the public’s opposition, as the online retail industry has grown so have the lobbying efforts of big box retailers to impose these taxes on businesses that have a small or no physical footprint and rely on online sales. This proposal is not about “leveling the playing field” but rather about protecting traditional bricks-and-mortar stores from competition. The U.S. Supreme Court’s 1992 decision in Quill Corp. v. North Dakota ruled a state must prove a company has a “substantial nexus” within its borders before a seller can be forced to collect state taxes. Since this ruling, the nexus or “physical presence” standard has been an important taxpayer protection.

The Marketplace Fairness Act would effectively gut the physical presence standard for sales taxes and give states a vast new power over businesses and taxpayers outside their borders, including the imposition of auditing requirements and expansion of taxation powers on out-of-state businesses and individuals. Tax competition among states has been one of the key factors in keeping taxes low.

The imposition of sales taxes on Internet purchases would slow the growth of the e-commerce industry and place an undue burden on consumers and small online businesses to the benefit of big box stores and big e-retailers that already have a physical presence in most states. 

The lure of millions of dollars in new tax revenue has proven irresistible for many cash-strapped states, but Internet sales taxes are unlikely to raise the lofty revenues their sponsors claim. Several states already have committed their expected Internet sales tax revenue to new projects or tax reductions, and this is a mistake. Like any tax, sales taxes affect how and where people shop, and it is not yet clear these taxes won’t drive shoppers away from the Internet market. It is likely many smaller e-businesses will end up closing shop as the added compliance costs and reduction of shoppers erode their businesses profitability.

Instead of creating different rules for online and bricks-and-mortar stores, lawmakers should apply the same origin-based standards to both. This would truly level the playing field, with both online and bricks-and-mortar retailers paying the same tax.


Matthew Glans ([email protected]) is senior policy analyst for The Heartland Institute.