The Senate Committee on Commerce, Science and Transportation
held a hearing
on “Marketplace Fairness: Leveling the Playing Field for Small Business” this month. Unfortunately, the substance of the hearing
had very little to do with the laudable title, as it dealt with the Marketplace
Fairness Act, which would shift the burden of tax collecting requirements
to online retailers regardless of physical presence. In contrast with other senators on the
committee who seemed to accept the premise that it was somehow fair to impose a
tax collection mandate on small online businesses over thousands of tax
jurisdictions, Sen. Jim DeMint (R-SC) and Sen. Kelly Ayotte (R-NH) demonstrated
their understanding both of the compliance burdens such a mandate would entail,
and also of the value of different business models.
Proponents of the bill have presented the issue as one of
fairness: that requiring online retailers to collect taxes would eliminate a
price disadvantage for brick-and-mortar retailers. That could perhaps be considered accurate if
we were comparing two identical business models with the only difference
between them being that one collected sales tax and the other didn’t. However, the e-commerce business model of
online retailers is distinct from that of brick-and-mortar retailers with
differences going far beyond just tax collection. At the hearing, Sen. DeMint stated that not
all business models are the same and the federal government cannot make them
the same. In addition, the tax
collection burden of administering for thousands of jurisdictions because an
online purchaser could potentially be in any of them is not comparable to
collecting only for the location of a physical store. Not only is it overly simplistic to focus on
sales tax collection as the only difference to be addressed, but the compliance
burden is far heavier for online retailers. This bill is a lopsided remedy based on an
inaccurate diagnosis.
Republican proponents of the bill have been touting it as a
“states’ rights” bill that would enable states to collect the sales taxes they
are entitled to within their borders.
However, does a state have the right to draft online retailers who are
outside their borders into service to collect for them? At the hearing, Sen. Ayotte wondered why an
online retailer in New Hampshire (which has no sales tax) would have to file
tax returns in other states. Do states
with no sales tax have no rights?
In a
Wall Street Journal op-ed, Sen. DeMint called proposals like this bill
“taxation without representation,” and “antithetical
to our federalist system, which promotes competition among our states for the
best economic policies.” Bill supporters
protest that the consumers who owe the tax are residents of the state. However, it is certainly a “tax collection
mandate without representation” for remote sellers.
Sen. Michael Enzi (R-WY), the bill’s sponsor, called Internet sales a “tax
loophole.” The link between physical
presence and taxes is not a loophole but a long-established principle that
should not be swept aside to satisfy the states’ hunger for revenue. We hope other senators join Sen. DeMint and
Sen. Ayotte in contemplating the consequences of severing that link and
considering what kind of “fairness” it would actually bring about.
