Most of Congress agrees that the Internet access tax ban should continue, at least for now; even the House passed the Internet Tax Freedom Act (ITFA) with merely a voice vote. It seems like it would be almost unanimous in the Senate, too, but one hot topic attached to access taxes is causing controversy: the Internet sales tax. The four-page ITFA bill also contains a provision that protects against discriminatory taxes on electronic commerce. While brick-and-mortar stores have a definitive sales tax they pay based on where they’re located, e-retailers do not. Without sales tax protection, e-retailers could have to pay up to 9,600 different state and local taxing bodies, an administrative expense that the average small business owner could not handle (24 million Americans, where 29% make less than $10,000/year in sales). On top of that, if a taxing body charges the wrong tax or makes a mistake and an e-retailer needs to take legal action, they would incur further costs for lawyers and litigation that would diminish the incentive to sell anything online in the first place.
A group of senators is planning to hold Internet access taxes hostage (the ban expires November 1st, 2014) in an attempt to force the Internet sales tax question. They created their own version of an Internet tax freedom act, but with many perversions that cater to the retail industry giants who could easily soak up the administrative costs and send their armies of lawyers to court for them. This new fourteen-page bill, the Marketplace and Internet Tax Freedom Act (MITFA), only extends the Internet access tax ban by 10 years instead of permanently, and it would open up the 9,600 different state and local tax collecting agencies—many of whom are in debt—to enforcing burdensome regulation and taxation on e-retailers.
Imagine someone who makes homemade trinkets and sells them online, perhaps something they started doing while on unemployment or just as a hobby. If they get orders from many people across the country, they would have to calculate each tax rate in each location of each customer. What if they fail to do so? Many state and local authorities charge high fines if a seller does not pay sales taxes, and you can even go to jail. Suppose they find a charge that shouldn’t be there, but the taxing body disputes it. Where would this person find the money to fight the legal battle this would cause? They might just settle, even if they were never in the wrong. This is what the legal language of the current law banning Internet sales tax means by discrimination.
There is even legal precedent set by the SCOTUS in the case Quill Corp. vs. North Dakota. In this case, North Dakota was trying to make Quill Corp., an office supplier based out of Delaware, pay taxes for advertising and selling its products in the state. The Supreme Court ruled that a business has to have a physical presence in a state in order to be subjected to its sales taxes. In 1992, Justice Stevens delivered the opinion of the Court in which he said “…because the State had not shown that it had spent tax revenues for the benefit of the mail order business, there was no ‘nexus to allow the state to define retailer in the manner it chose.’”
Quill has three warehouses in three separate states, so it is paying sales taxes in those states that it runs its operations out of. States that foster poor business conditions should not be allowed to tax businesses in other states just because customers order items from them online. This would defeat basic competition between states and would be unfair to states that are responsible. States that have ruined their economies can’t be allowed to suck out money from successful companies in other states whose business conditions are better. Some states don’t even have general sales taxes, and their companies would be forced to pay an extra expense that they never needed to before.
E-retailers are not dodging taxes because they do have a physical location somewhere. If anything, banning Internet sales taxes would force states to rethink their economic policy. Challenges and tough times can often spark amazing motivation for real growth and change. Opening another source of revenue for states that have proven time and again mismanagement of funds would be a disaster for everyone involved. Successful companies that have harnessed the equalizing powers of technology would be penalized, and American consumers would be left with less choice and less in their wallets.
The ITFA bill that has passed the House is now in the Senate’s hands; the bill is concise at only four pages, and most people would be able to easily understand it. It would permanently ban Internet access taxes and multiple and discriminatory taxes on electronic commerce. The proposed MIFTA bill, masquerading as a better alternative, would only ban access taxes for 10 years, but allow almost 10,000 tax collecting agencies a chance at a massive money grab, convoluting competition and reducing economic freedom. Contact your senators today and tell them to take up a vote on IFTA, not MIFTA, before November 1st. We only have 59 days left.