Innovation Policy Post

On February 14, another version of the Marketplace Fairness Act was introduced in the House and Senate. Like its previous incarnations in past Congresses, this bill would give states the authority to require out-of-state online retailers to collect sales and use taxes on purchases made to residents of their states -- regardless of physical presence in those states. CCIA has consistently opposed such legislation as saddling small Internet retailers with the burden of collecting taxes across thousands of jurisdictions, and penalizing them for daring to utilize the Internet for a new business model. As supporters of this bill have described it in terms of “fairness” and “leveling the playing field,” let us examine how accurate this language is.

Sen. Mike Enzi (R-WY), one of the Senate sponsors, stated that “The federal government should not favor some businesses over other businesses” and that it was time to “put local and Main Street retailers on a level playing field with their out-of-state and online counterparts.” Rep. Steve Womack (R-AR), a House sponsor, also said the bill “levels the playing field for our Main Street businesses rather than continuing to allow the government to pick marketplace winners and losers.” We completely agree that the government should not show favoritism nor pick winners and losers. However, for this bill to actually result in a level playing field, the tax collection burden for online retailers would have to match that of brick & mortar stores. While the physical store only needs to collect sales tax for its own tax jurisdiction, an online retailer is being asked to administer a tax collection regime for thousands of jurisdictions, as an online purchaser could potentially be in any one of them. The difference between “one” and “thousands” would seem to constitute a significant disadvantage for online retailers and a less than level field. The government would be picking e-commerce as the loser and traditional physical stores as winners.

Sen. Lamar Alexander (R-TN) described the bill as being “about a two-word issue: states’ rights.” Do states have the right to dragoon online retailers beyond their borders into collecting taxes for jurisdictions they have no physical presence in? What about states with no sales taxes, whose online retailers will nevertheless be forced to collect taxes for, and possibly face audits from other states? Do states’ rights only extend to those states with sales taxes?

Sen. Enzi also described the status quo as “one of the largest tax loopholes of our lifetime.” A loophole is defined as: an ambiguity or omission in the text through which the intent of a statute, contract, or obligation may be evaded. The 1992 Quill decision made clear that physical presence was required for sales tax collection. Online retailers are not evading anything because the obligation does not exist and was never intended to exist. Breaking the connection between physical presence and taxation would not be merely closing a loophole but would be nothing less than a complete reimagining of the concept of taxation.