The Marketplace Fairness Act (MFA) once again rose from the dead recently, when a group of legislators reintroduced MFA in the U.S. Senate. If passed into law, MFA would significantly change how online retailers are taxed by allowing state governments to charge sales taxes on out-of-state retailers, regardless of whether the retailer has a physical presence in the state. States would also be able to audit these businesses and empowered to create their own unique definitions of how and when items are taxed, increasing confusion for out-of-state sellers.
The majority of support for the MFA comes from legislators seeking new tax revenue or interest groups using the government to undermine their competition by imposing a tax on their online competitors. Proponents argue the proposal confirms the ability of states to charge sales taxes as they see fit, and they have begun to frame the issue as a matter of state’s rights.
The proposal violates the key tax principle requiring a physical presence to impose a tax and is inconsistent with fair taxing principles. Allowing one state to tax a resident of another state, however, represents an expansion of state taxing powers, which logically end at the state’s borders. This expansion of powers would undermine tax competition by limiting the ability of taxpayers to move between states and their tax systems. Tax competition among states has been one of the key factors in keeping taxes low.
Matthew Adams of Americans for Tax Reform argues MFA would shift much of the tax burden of internet sales to businesses, which may not be able to absorb the costs. “It shifts the tax burden onto businesses as they would now have to collect a sales tax in these types of transactions and report and file to dozens of other states,” wrote Adams. “This all results in taking even more money out of your pocket. Worst of all, it discourages tax competition and business incentives amongst the states, and instead encourages higher tax rates. While presented as a protector of America’s small businesses, the bill would only subject our already struggling mom-and-pop shops to a greater regulatory and tax burden.”
Removing the physical presence standard for sales taxes also reduces states’ accountability to taxpayers. Consumers, who ultimately bear the burden of added costs, are the real losers in this scenario. The “nexus” standard is an important taxpayer protection that has been upheld in the U.S. Supreme Court. This standard protects citizens from an abuse that Americans have fought against since our nation’s inception: taxation without representation.
Critics argue the proposal has not improved over time. “This was a bad bill in the last Congress and it’s still a bad bill now,” said Andrew Moylan, R Street executive director, in a statement. “By wiping away geographic limits to state tax authority, the legislation would impose serious burdens on Internet retail and undermine basic tax policy principles.”
The MFA could also lead to a deluge of new taxes. “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,” commented John Nothdurft of The Heartland Institute in a statement.
It is not justifiable to allow a state to charge sales taxes to residents of another state, as the latter have no political voice in the taxing state and receive no government benefits or services. Instead of forcing out-of-state businesses to serve as government tax collectors, Congress and state legislators should implement a sales tax system based on where the product was sold, known as an origin-based tax system. This would truly level the playing field, with both online and bricks-and-mortar retailers paying the same tax.
The following documents examine internet sales taxes and the Marketplace Fairness Act in greater detail.
Research & Commentary: Tennessee Challenges Quill Standard for Internet Sales Taxes
In this Research & Commentary, Senior Policy Analyst Matthew Glans examines Tennessee’s proposed internet sales tax. “Instead of forcing out-of-state businesses to serve as government tax collectors, state legislators should implement a sales tax system based on where the product was sold, known as an origin-based tax system. This would truly level the playing field because online and brick-and-mortar retailers would pay the same tax,” Glans wote.
The Marketplace Fairness Act: A Primer
Joseph Henchman of the Tax Foundation outlines the internet sales tax issue in this primer, which covers the Quill physical-presence rule, the Streamlined Sales Tax Project, state “Amazon tax” laws, the hybrid origin-sourcing proposal, and proposed federal legislation.
Research & Commentary: Preserve the Quill Nexus Standard for Internet Taxes
In this Research & Commentary, Senior Policy Analyst Matthew Glans discusses state internet sales taxes and a proposed bill to codify the long-standing nexus standard. “The proposal is a step toward ensuring online sales taxes are only imposed when a seller receives the benefits of such a tax. Maintaining the Quill nexus standard is essential to preserving the internet economy,” Glans wrote.
Taxes on Remote Sales
This election brief from the Kem C. Gardner Policy Institute at the University of Utah examines the complexity of online sales, including the legal context and growth of online sales, and provides some policy options for consideration.
Policy Tip Sheet: Myth vs. Fact – Internet Taxes
In this Heartland Institute Policy Tip Sheet, John Nothdurft examines several myths and facts about Internet taxes.
Research & Commentary: Internet Sales Taxes
This Heartland Institute Research & Commentary on internet sales taxes explains how taxing the internet hurts business and fails to bring in the revenues proponents hope for: “The new tax-remittance burden, however, would fall on online retailers. It would add to their costs and could demolish one of the last remaining redoubts of vibrant economic enterprise—the last thing any state needs during a deep recession.”
The Internet, Sales Taxes, and Tax Competition
Veronique de Rugy and Adam Thierer discuss the Main Street Fairness Act in this study from the Mercatus Center. The new legislation would force retailers to collect sales taxes for states joining a formal tax compact. The authors examine alternatives to the tax, including an origin-based sales tax.
An “Original” Solution to Taxation of Online Sales
Writing for the American Legislative Exchange Council, Andrew Moylan discusses the origin-based sourcing rule for internet sales taxes and explains how it solves many of the problems created by destination sourcing: “Perhaps the most important advantage of origin sourcing, however, would be the infusion of tax competition it could engender. Under such a system, businesses would have an incentive to invest in lower-tax jurisdictions so as to attract price-conscious customers.”
States Already Can Tax Out-of-State Purchases, but Rarely Enforce those Laws
Michael S. Greve of the American Enterprise Institute considers an overlooked issue in the internet sales tax debate: the often-unenforced use tax. Currently, if a product is purchased from a “remote” seller with no contact with a consumer’s state, the sale is not “tax-free”—the consumer owes a “use tax” equivalent to the local sales tax. Many states do not enforce this tax.
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News website, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.
The Heartland Institute can send an expert to your state to testify or brief your caucus; host an event in your state, or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact John Nothdurft, Heartland’s director of government relations, at [email protected] or 312/377-4000.