Over the past several months, talk in Congress of imposing an online sales tax has begun to heat up. Two bills before the Senate and House—The Marketplace Fairness Act and The Marketplace Equity Act, respectively—offer similar proposals to force online retailers to begin collecting sales tax from their customers, regardless of the state or municipality in which the business or consumer resides. Although the bills have a few differences, the goals are the same. Both bills would allow states to require retailers to collect sales tax on their customers and send the proceeds to the state in which the customer resides. It could add a $23 billion tax bill at the state level, according to Americans for Tax Reform. The bills are currently under debate and could be on the docket when Congress returns from their August recess.
Many have lined up in support of the bill, including members of both parties in the House, Senate and Governors around the country. Retailers like Wal-Mart, Best Buy and even large Internet storefronts like Amazon have lined up to support imposing taxes on businesses that conduct on the Internet. With the firepower lined up against the continued freedom of online retailers, there’s a very good chance that consumers could be spending a lot more of their income in taxes. This is disconcerting, as Internet retail spending is expected to increase by 62% by 2016, according to a study by Forrester Research. Where has this coalition of support come from and why?
Big businesses like Amazon could see it as a way to keep smaller competitors off their turf. Many supporters of the bills call these new taxes a way to level the playing field, making it so that all businesses, whether online-based or brick and mortar, will have to collect sales taxes. But brick and mortar businesses only collect sales tax in one jurisdiction—online retailers would be forced to collect taxes for thousands. By requiring retailers to collect taxes in thousands of tax jurisdictions, government would be imposing a huge burden on small and medium sized businesses that sell goods online. As Adam Thierer points out, a much more reasonable alternative would be for an origin-based sales tax rule—taxing goods from where they’re sold rather than where they’re bought. But even this is something that many politicians won’t do.
Policymakers see these bills as a way to pad their coffers—rather than finding ways to cut out of their budgets, they’re looking for new ways to grab even more tax revenue from consumers. As Dan Mitchell points out, the Marketplace Fairness Act and the Marketplace Equity Act both place incredible burdens on the collection of the taxes, including the need to create databases of consumers and their purchases and making matches based on residency. And many politicians dislike the origin-based sales tax suggested by Thierer because it could make more business flee high tax states to more hospitable environments. Of course, the right move is to not use the heavy hand of government to influence behavior—instead, providing incentives to stay through a better business environment is a much more reliable way to go.
The bills as written could have negative consequences on a variety of fronts. Slapping a tax on a fast growing sector of the economy is a bad idea. As any economist will tell you, the quickest way to discourage a behavior is provide a disincentive for engaging in that activity. Second, it’s bad for competition. If a new sales tax is imposed, it will favor large companies who can afford to hire the lawyers and accountants and staff to navigate the quagmire of thousands of tax jurisdictions worth of regulations and laws. Only billion dollar big box retailers can survive something as imposing. It’s terrible for small and medium sized businesses, the workhorse and engine of economic growth and job creation in our country. In some states, Amazon has dropped their affiliate programs because of new regulations, something they would be sure to do if an online sales tax was imposed. Thousands of small businesses rely on the affiliate program. Etsy, the online retailer that allows creators of handmade goods to sell in their digital storefront, would be forced to develop a mechanism where hundreds of thousands of retailers would have to each individually collect sales taxes for each of the thousands of municipalities. The same goes for eBay. A new tax imposed on consumers, at a time of the weakest economic recovery since World War II, is a step backward for economic growth.
Zack Christenson writes on digital tech issues for the American Consumer Institute