The Marketplace Fairness Act, Part Deux

The Senate has once again introduced a bill to solve the bifurcated issue of recovering sales tax revenues that states and local communities are losing to internet retailing while also correcting the unjust advantage that internet retailers have over local ones. This issue has been debated inside and outside of Washington D.C. for the last couple of years with both bipartisan support and resistance, and with the House being less eager than the Senate to bring the issue to a final vote.

In the last Congress, both houses had versions of a bill which proposed a rather generous exemption that did not require sales tax to be collected by retailers under a certain amount of annual sales. This idea was largely promoted by Ebay in its self-interested desire to protect the volume of sales it enjoys from its many eBay Store sellers, from which it extracts ~12% from every transaction. Clearly, this $Billions-annually profiting cash cow doesn’t think the states should get their smaller share in sales taxes which, by law, they are already owed but simply not collecting. Suffice it to say that services at home for fire fighters, police officers, ambulances, roads, parks and the many other things that sales taxes help to pay for are not being made up in contributions by eBay to our communities to pay for the same things.

However, other opposition has centered around the “difficulty” of internet retailers to collect and pay individual sales tax rates to 47 states and hundreds of jurisdictions. This argument lost a lot of merit with the recognition that software solutions already exist to completely automate the calculation, collection, and payment of the taxes, the recognition of which the proponents of this paper tiger argument tried largely to ignore.

Presently, a new idea is circulating the halls of government which may bear a fresh examination and could solve a number of difficulties with bringing the Act to a final vote. The thought is this: instead of collecting sales tax on internet transactions on the basis of the customer’s jurisdiction, why not do so on the basis (or sales tax rate) of the seller’s jurisdiction, but remitted to the taxing authority where the customer is located?

On the one hand, this removes altogether one aspect of the difficulty argument by applying a single tax rate to all transactions of a given seller. While remittance still must be made to many jurisdictions, again easily automated by software, that magical technology, internet retailers intimately understand, that enables them to be in business in the first place. In addition, this idea is being packaged with the elimination of any revenue exemptions which, themselves, add unnecessary complexity and nullify any national law to unify collection of sales taxes since any internet retailer can simply and endlessly launch more websites owned by separate paper corporations to ensure that no one of its sites ever earns more than the exemption threshold (escaping all sales tax liability).

But there are questions the new strategy raises: will it inspire location or movement of internet sellers to states with lower or zero sales tax rates? Will jurisdictions with high rates lower their sales tax rates and, not wanting to go without the income, shift the burden to property or other localized taxes which damage local economies and make housing and small business ownership more expensive?

While I find the idea interesting to explore, and have not fully explored it myself, I am still of the preference that we should allow software automation to solve the complexity issue but still collect sales taxes based on the purchaser’s location, without revenue exemptions for retailers. There is simply no good reason not to, except those self-interested reasons that internet retailers have to protect the unwitting and unfair, government-caused competitive advantage they have been enjoying for years over local retailers at home. The government has a duty to solve any condition where its own laws advantage one business over another without a worthy and sufficient public interest to do so, which no one I have heard has ever been able to make on this issue.

And there is every good reason to do this in the way I have suggested, because when local consumers exercise their freedom to buy whatever they wish from wherever they wish, and also the freedom to live wherever they wish, they should be paying back into that community for the government services they enjoy which are part of why they choose to live there. The rate of payment is that rate which they, as voters, have supported. Paying someone else’s rate based on local conditions in that distant place simply does not make logical sense.

That’s my take for now. The issue is not yet near to resolution and someone may yet come up with an even more novel idea to gain the support needed to finally put it to rest.

Jeff Koenig