A Further Perspective

Don’t Tax the Internet

Conservatives should run, not walk, away from the so-called "Marketplace Fairness Act."

By 3.19.13

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Senate Republicans will face a fork in the road this week when Sen. Dick Durbin, D-Ill., forces a vote on a measure paving the way for expanded state sales tax collection for online purchases. The route Durbin would have them take would eventually lead to passage of the so-called "Marketplace Fairness Act," a bill that dramatically expands state and local tax authority in order to help bail out states like his native Illinois. The other avenue would protect taxpayers from perhaps the scariest Internet predator: government. A vote on Internet sales taxes during this week’s budget process will tell us which path conservatives will choose. 

On the occasion of the first Senate budget resolution in more than four years, Sen. Durbin is likely to introduce a "deficit neutral reserve fund" amendment that is essentially a proxy for his bill, S. 336. Despite what its supporters claim, this legislation is bad news for conservative principles and limited government. Though there are innumerable problems with the bill, there are several that should be of particular concern to Senate Republicans.

First, it countenances an enormous expansion in state tax collection authority by wiping away a protection that shields taxpayers from harassment by out-of-state collectors. The "physical presence" standard dictates that a state can only require businesses physically present within its borders to collect its sales tax. This common-sense principle underpins virtually all of American tax policy, but this legislation would eliminate that protection for remote retail sales, allowing state tax collectors to target businesses all across the country. 

Though supporters claim that it would "level the playing field" between brick-and-mortar and online retailers, the bill would in fact do the exact opposite. Brick-and-mortar sales across the country are governed by a simple rule that allows the business to collect sales tax based on its physical location, not the home of their buyer. Tourists making purchases in Washington, D.C. establishments pay the district’s sales tax, not that of their hometown back in Cheyenne or Memphis.

Meanwhile, online retailers would be denied that convenient standard and would instead be forced to collect based on where their innumerable customers live. This means quizzing purchasers about their location, looking up the appropriate rules and regulations in more than 9,600 taxing jurisdictions across the country, and then collecting and remitting sales tax for that distant authority. No brick-and-mortar shop has to do this for in-store sales, and yet every online retailer would have to do it for remote sales. 

This much more burdensome collection standard would create substantial interstate commerce burdens. Because they would now have to comply with the complex sales taxes in thousands of jurisdictions, online sellers would face serious collection and compliance costs. In fact, the paltry $1 million “small seller exception” in the bill (itself a good $29 million short of what the Small Business Administration says a small business is) is an explicit acknowledgment that it will impose significant costs and that some should be spared the pain.

And while technology has advanced greatly since the Internet’s infancy, we are no closer to having solved sales tax complexity with software than we are to solving income tax complexity with TurboTax. The challenge in tax compliance (of all sorts) comes not in mustering the computing power to do the math, but in the interpretation of a specific circumstance through endless rules and regulations. 

In seeking to address the failures of the existing tax systems employed by states, S. 336 ends up giving federal blessing to a massive expansion in state tax collection authority, the dismantling of a vital taxpayer protection upon which virtually all tax systems are based (the notion that physical presence is the appropriate limit for state tax authority), all while harming a sector of the economy, online sales, that still only accounts for roughly $0.07 of every $1 in retail spending.

When Dick Durbin lays out his path this week, conservatives in Congress should run, not walk, in the other direction.

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About the Author

Andrew Moylan is the senior fellow and outreach director of the R Street Institute, a free-market think tank based in Washington, D.C.