Internet Retailing Under the Marketplace Fairness Act
For far too long, the American people have allowed their lawmakers to think they can tax just about anything. One of the more presumptuous taxes that lawmakers impose on us is the so-called "use tax," which works in tandem with the sales tax. Basically, the use tax is a sales tax states levy on out-of-state purchases. The responsibility for paying the use tax is laid upon the individual, not the retailer.
The big snag with the use tax is that in the 45 states that have it, only about 1.6 percent of taxpayers actually pay it; it's fairly unenforceable and compliance is effectively optional. To remedy this, some have been pushing for a federal law that would allow states to force Internet and catalog retailers in other states to collect and remit sales taxes for them. So on May 6, the U.S. Senate passed the Marketplace Fairness Act (MFA). This would be is a lousy law, and the House should roundly reject it.
The main reason to reject the MFA is the U.S. Constitution. On May 9 at U.S. News, Pete Sepp, Executive Vice President for the National Taxpayers Union (ntu.org), wrote: "The U.S. Constitution was designed to provide each state a high degree of sovereignty within its own border, while affording citizens of other states a high degree of protection against predatory policies from outside their borders." At The Hill, Matt Kibbe, President of FreedomWorks, asserts that the MFA "undermines state sovereignty and allows for taxation without representation in five major ways." In "The Internet Sales Tax: Another Assault On The Constitution" at Frontpage Mag, Mark Hendrickson writes:
Allowing state governments to begin imposing sales tax on out-of-state businesses is worse than unfair: It's unconstitutional. The federal government has no such authority. Article I, Section 9, Paragraph 5 on the United States Constitution stipulates, "No Tax or Duty shall be laid on Articles Exported from any State." Article I, Section 10, Paragraph 2 of the Constitution states, "No state shall, without the Consent of the Congress, lay any Imposts or Duties on Imports or Exports..." The constitution created the world's first large free-trade zone -- the United States of America -- and for a majority of United States senators to place expediency above constitutional integrity is unconscionable. [Links added.]
One of the reasons an American might reside in one state rather than another is because of their differing tax regimes. But under the MFA there is no escape; a state you left precisely because of its wretched tax policies could still come for you if you're a retailer in another state. In the Boston Globe just before the Senate passed its wretched bill, Jeff Jacoby wrote:
Under existing law, any state can require businesses within its borders to collect sales taxes from their customers. That applies to shops on Main Street as well as to vendors doing business by mail and over the Internet. If you're a seller physically operating within the Commonwealth of Massachusetts, for example, part of your job is to collect the requisite Massachusetts tax each time you ring up a sale in the state. At the same time, you can't be conscripted into serving as a tax collector for states to which you have no physical connection. The Supreme Court has repeatedly affirmed that merchants must have a "substantial nexus" with a state -- such as offices, a warehouse, or a sales force -- before they can be compelled to collect taxes on that state's behalf.
One of the ugly aspects of the MFA is that it would exempt brick-and-mortar retailers from the rigors it subjects Internet retailers to. Pete Sepp asks: "But wait, wouldn't it be absurd for clerks at physical stores to quiz customers about which of the 9,600 taxing jurisdictions they reside in, at the cash register, and require remittance of sales taxes back to the purchasers' home states?" So use taxes would still need to be on the books in order to collect taxes triggered by purchases at out-of-state "physical stores," i.e. brick-and-mortar retailers. Unless both types of retailers are treated the same, it's difficult to see the fairness in the Marketplace Fairness Act.
In a 2012 article at the American Enterprise Institute, Alan D. Viard makes a case for the use tax in which there are 18 iterations of "commerce clause." Viard seems to think the use tax is reasonable. But the same reasoning that says a state has the right to tax residents on purchases they make out-of-state could just as easily support taxing new residents on the possessions they bring with them when they move into the state (unless they can prove they bought them in-state). Or a state might simply bar the importation of anything purchased out-of-state. For instance, it is generally illegal to bring liquor into Pennsylvania. All such laws are predicated on the possibility that a state might miss out on sales tax revenue.
What's really pathetic about the MFA coming at this moment is that we just went through something very similar with ObamaCare. The reasoning undergirding that law was that Congress had authority to command folks to buy health insurance because health care affects interstate commerce. But the Supreme Court found that Congress does not have the authority to command folks to buy stuff. With the MFA, however, the U.S. Senate is saying that the states can command retailers in other states to collect taxes for them... but by what authority?
Lawmakers in the several states think the MFA will level the playing field and help brick-and-mortar stores that must collect sales tax. It doesn't seem to register with these state lawmakers that they themselves are the ones who so burdened their retailers. So their brilliant solution is to dragoon retailers in other states into being their tax collectors, with all the complexities and expense that come with that. And then there's the question of breaking the new law: would states be able to extradite retailers in other states who refuse to collect taxes for them? (Grover Norquist of Americans for Tax Reform raises several troubling questions about the workability of the Act.)
Even for a Senate run by Harry Reid, the MFA is impressive in its stupidity. But then, like so much else in D.C., the MFA may have been passed just for show; senators might think it has little chance of becoming law. Nonetheless, the MFA might become law.
(Here's the text of the Senate bill as referred to the House Committee on the Judiciary, and here's the statement of that committee's chairman, Bob Goodlatte, upon Senate passage on May 6. Here's how senators voted on the MFA.)
Real Americans should have no use for the use tax, nor should they support the MFA. But there's a simple way to capture the revenue "lost" to out-of-state sales, and that's to end the sales and use taxes and raise the state income tax. (I even ran the numbers on one such plan my damn self.) But state lawmakers would be against such a fix because they want residents to think that someone else is paying for everything -- it's the tourists, casino gamblers, and rich folks who are paying taxes, not you "little people."
Except that each time the little people buy something, they pay a sales tax. And if they buy something out-of-state, they're supposed to pay a use tax.
In states that do have sales taxes, Internet, and catalog retailers are already paying them. For lawmakers in other states to think that they should get in on that action, when they have provided neither infrastructure, nor police, nor anything else for those retailers is the height of presumption. Perhaps retailers should be able to vote in the elections of the 9,600 taxing jurisdictions for which they may soon have to collect taxes.
Our lawmakers think they can tax every transaction, every event, and, as seen in the current IRS scandal, every thought and prayer that occurs in America. It's high time to get back to limited government.
Jon N. Hall is a programmer/analyst from Kansas City.