A new online sales tax bill has made its way to the floors of both houses of Congress, the latest in a long line of attempts to pass some sort of federal online sales tax legislation. The latest attempt is known as The Marketplace Fairness Act. The bill is the combination of three other bills introduced last session and appears to be the legislation of choice for sponsors of those three bills. The bill is an attempt to standardize the way sales taxes are collected online, and, according to the bills sponsors, will attempt to put Internet retailers on an even footing with “bricks and mortars” retailers.
There have been a variety of new taxes proposed over the years to collect Internet sales tax. This latest iteration would give states the power to collect sales tax on retailers outside their jurisdiction. So for example, an Internet retailer based in Michigan shipping a product to Ohio would be bound by the sales tax laws of Ohio. If that same Michigan-based company did business in all 50 states, they would be bound by the laws and regulations of 9,600 different jurisdictions. It would be up to the states to decide how high their taxes would be, how they’re enforced and by what mechanism they’ll be paid. Internet retailers would be at the mercy of a variety of different laws governing how they conduct business.
As you can imagine, this could be disastrous for Internet-retailers, which are often small to medium sized businesses that are run by bootstrapping entrepreneurs. The bills proponents argue that The Marketplace Fairness Act puts Internet retailers on an even footing with brick and mortar establishments, but that’s anything but true. It actually puts Internet businesses at a competitive disadvantage—Internet retailers must comply with many more times the paperwork of their brick and mortar competitors. The burden of complying with 9,600 different tax jurisdictions could put an end to small business owners conducting commerce on the Internet, because the cost of paperwork and legal and accounting fees required to comply would be too great for anyone but the largest retailers to handle. It’s no wonder that the big players in the market, the Amazon’s of the world, are on board with the new regulations. The costs are a drop in the bucket to a company with revenue in the billions, and it has the added benefit of clearing out the competition, increasing the bottom line for the large retailers.
Meanwhile, consumers are also hurt. As small and medium sized retailers die out, consumers are left with less choice in their purchases. This gives less incentive to the larger retailers to keep their prices low—why lower your prices when there isn’t a competitor to undercut you? The Internet retailers that do survive will also be forced to raise their prices to meet the costs of the legal and accounting regulatory burdens as a result of keeping up with the different tax jurisdictions. In the end, consumers lose.
If Congress is set on imposing new forms of taxation on Internet retailers (which I would advise against), there are better ways. One form that’s been proposed is origin-based sourcing, which would allow sales tax to be collected the same way its collected from brick and mortar establishments—taxed only by the jurisdiction where a physical presence is located. Because states want to avoid chasing away shoppers into neighboring states, this approach would maintain “pressure” on states to keep tax rates comparatively low. On the other hand, The Marketplace Fairness Act eliminates the pressure to keep tax rates reasonable by making every consumer pay their state tax regardless of where they shop online.
Internet retailers are seeing explosive growth, with many startups such as Gilt, Rue La La, One Kings Lane, or Warby Parker, springing up all the time. The industry is gaining a great deal of investment and generating revenue at a time when the rest of the economy has seen better days. Imposing new, burdensome regulations on a sector of the economy actually seeing growth is a step in the wrong direction.
Zack Christenson is a digital tech writer for the American Consumer Institute