Marketplace Fairness Is Not A Fair Option
On July 15, 2014, the House of Representatives overwhelmingly passed H.R. 3086, the Permanent Internet Tax Freedom Act. This legislation would make the current moratorium on Internet access taxes, which was first enacted by Congress in 1998. However, Democratic leaders in the Senate allowed the bill to languish in an effort to appease a few senators who wished to tack on to the bill a more controversial taxing measure, the Marketplace Fairness Act. In order to avoid the expiration of the existing Internet access tax moratorium on November 1, Congress included a temporary extension in the continuing resolution until December 11, 2014.
S. 743, the Marketplace Fairness Act (MFA) sounds innocuous. However, in Orwellian fashion, the title means quite the opposite (think…Affordable Care Act).
The MFA would force businesses performing commerce online to become tax collectors for the more than 9,900 state and local tax jurisdictions across the nation. A business located in Wisconsin selling goods to an individual residing in Los Angeles, California would be required to collect sales tax for both the state of California and Los Angeles County. According to the National Taxpayers Union, Texas has the largest number of sales tax jurisdictions (1,515). Delaware, New Hampshire, Oregon, and Wisconsin have no sales tax. Alaska does not have a statewide sales tax, but some of its jurisdictions charge a local sales tax. Currently, there are 34 states that have a destination-based sales tax collection requirement, and 11 states with an origin-based sales tax law.
On May 26, 1992, the U.S. Supreme Court ruled in Quill v. North Dakota that if a company did not have a “physical nexus” within the state, that state could not require the company to collect sales taxes from a customer. This decision was made before online shopping became as prevalent as it is today; states now believe they are losing significant tax receipts because consumers are not paying taxes on their purchases. Brick-and-mortar stores also want these tax collection burdens placed on online commerce, claiming that customers use their storefronts as mere showrooms for merchandise they plan to purchase online in order to avoid paying any sales tax.
Other proposals have begun to surface to resolve the alleged problem that states are having in collecting the appropriate tax from their residents when dealing with remote sales. The Streamline Sales Tax proposal is similar to MFA, while another proposal suggests basing the sales tax on the origin of the product as opposed to its destination. Eleven states have already adopted an origin-based tax structure, under which consumers pay the tax rate for the state in which the purchase was made, not the delivery location. This would ease the filing burden on the seller by requiring them to know and remit the taxes only for their specific location.
Most states that collect sales taxes already have a use tax to collect sales tax on remote sales, which is paid to the state at the time the taxpayer files income taxes. In Virginia, for example, there is a separate form to file with the state income tax return. The amount of tax owed is calculated based on the amount of untaxed purchases made through the year. Filing this form does require a bit of bookkeeping on the part of the taxpayer, who must separate online receipts for those where the tax was charged from those where it was not charged.
Determining the best path for tax collections on remote sales is not an issue that can be resolved in a day, a week, or even a few months. Yet, the Senate is poised to attach a problematic (and unresolved) proposal onto a piece of legislation that has wide bipartisan support in a cynical attempt to ensure the passage of a cumbersome tax-raising scheme. The Senate should disassociate MFA from the Permanent Internet Tax Freedom Act (H.R. 3086/S. 1431) and pass the latter bill as soon as the lame-duck session begins.
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