The Marketplace Fairness Act has once again risen from the dead. A group of legislators has once again introduced legislation which would significantly change how online retailers are taxed. The Marketplace Fairness Act would expand the ability of state governments to charge sales taxes on out-of-state retailers, regardless of whether the retailer has a physical presence in the state.
The new legislation, proposed by Republican Senators Mike Enzi and Lamar Alexander and Democratic Senators Dick Durbin and Heidi Heitkamp would give states a vast new power over retailers outside their borders, including the imposition of auditing requirements. States would be allowed to create their own unique definitions of how and when items are taxed, increasing confusion for out-of-state sellers.
Proponents argue the proposal confirms the ability of states to charge sales taxes as they see fit, and they have begun to frame the issue as a matter of state’s rights. In a statement published in The Hill, Mike Enzi argues the law empowers states thusly. “The Marketplace Fairness Act is about supporting the jobs we have in our towns. It is about the people who are our neighbors who work in our local stores,” said Enzi. “It’s time to give states the right to enforce their own laws without having to get permission from Washington.”
Each version of the bill has also attracted a wide array of critics, who argued in a letter to Congress that the Act would override important tax precedents and harm consumers. The letter was co-signed by several conservative, free market and libertarian groups, including The Heartland Institute, R Street Institute, Americans for Tax Reform, Americans for Prosperity and FreedomWorks. In the letter, the group argued the Marketplace Fairness Act would “dismantle proper limits on state tax collection authority while causing serious damage to electronic and interstate commerce.”
While some supporters of online taxes have argued these taxes are needed to restore a balance between online and bricks-and-mortar retailers, the letter argues the Marketplace Fairness Act would give brick-and-mortar retailers a distinct advantage over online retailers.
“Brick-and-mortar sales across the country are governed by a simple rule that allows the business to collect sales tax based on its physical location, not that of the item’s buyer,” commented the authors of the letter. “Under the ‘Marketplace Fairness Act,’ that convenient collection standard would be denied for online sales, forcing remote retailers to interrogate their customers about their place of residence, look up the appropriate rules and regulations in thousands of taxing jurisdictions across the country, and then collect and remit sales tax for that distant authority.”
The letter argues the Act could slow the growth of the e-commerce industry, one of the few sectors of the economy that has seen growth in recent years. “Imposing this unworkable collection standard on remote retail sales but not on brick-and-mortar retail sales would not only be unfair, it would result in enormous complexity while damaging interstate commerce. Online sellers would be weighed down by substantial compliance burdens associated with the existence of over 9,600 separate taxing jurisdictions, each with its own unique definitions, holidays, and rates. The bill’s paltry “small seller exception” of just $1 million (when the Small Business Administration sets the limit as high as $30 million in some cases) in remote sales does little to mitigate the damage.”
The letter concludes the Marketplace Fairness Act represents a dramatic expansion of state taxing powers while creating real obstacles for the future growth of online markets. “In seeking to address the failures of the “use tax” systems employed by states, the “Marketplace Fairness Act” ends up giving a federal blessing to a massive expansion in state tax collection authority, the dismantling of a vital taxpayer protection upon which virtually all tax systems are based, while harming a segment (online sales) that despite its dramatic expansion still only accounts for roughly $0.07 of every $1 in retail spending.”
Critics argue the bill has not improved over time. “This was a bad bill in the last Congress and it’s still a bad bill now,” said Andrew Moylan, R Street executive director in a statement. “By wiping away geographic limits to state tax authority, the legislation would impose serious burdens on Internet retail and undermine basic tax policy principles.”
The MFA could also lead to a deluge of new taxes. “The so-called Marketplace Fairness Act is anything but fair for the marketplace. Giving states a new open-ended power to tax out-of-state residents regardless of physical presence would be a disaster for consumers,” commented John Nothdurft of The Heartland Institute in a statement. “Bricks-and-mortar retailers enjoy many basic advantages over other retailers. Driving up the cost for purchases made online or by mail-order will hinder competition and open taxpayers up to a whole new slew of possible taxes.”
Jessica Melugin of the Competitive Enterprise advocated in a recent article for an alternative approach where remote sales are based on the where the purchaser lives, the so called origin-based approach. “And if legislators are serious about injecting fairness into taxing remote sales they should opt for an origin-based approach. All remote sales would be taxed at the principle point of business—whether online, by catalogue, or whatever we think of next. This would preserve tax competition among jurisdictions, keep authorities politically accountable to those they tax, and never trigger the need for cross state audits or consumer information collection. None of which can be said for the MFA.”
Public support is heavily stacked against the Marketplace Fairness Act. According to national and state-level polling done jointly by the R Street Institute and the National Taxpayers Union, there is a “nearly 40 point margin of opposition to MFA among Republicans, 20 points among independents and even five points among Democrats.”