The Right Opinion

There's Nothing Fair About the Marketplace Fairness Act

By Jeff Jacoby · Apr. 24, 2013

If truth-in-labeling rules applied to Congress, the proposed law giving states the power to collect sales tax from out-of-state online retailers would be named the Marketplace Unfairness Act.

Sponsored by Senator Mike Enzi, a Wyoming Republican, and fast-tracked to the Senate floor this week, the legislation would strip away protections that have been in place for decades, unleashing tax-hungry states on merchants they aren't answerable to and tilting the playing field against small Internet retailers.

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.

In practice this means that a brick-and-mortar retailer only has to calculate the sales tax charged by its own state. A bookstore at the Cape Cod Mall collects the Massachusetts sales tax of 6.25 percent; it makes no difference whether the customer at the cash register lives across the street or across the country. Online and mail-order retailers play by the same rules: If they have a physical presence in Massachusetts, they're responsible for any sales tax payable to Massachusetts. Neither traditional retailers nor Internet retailers are obliged to collect taxes for states they don't operate in. Fair's fair.

But if Enzi's bill becomes law, fairness goes up in smoke. Online merchants would become revenue collectors for every sales-tax jurisdiction in America – an estimated 9,600 of them, each with its quirks and quiddities. No longer would Internet retailers based in Massachusetts be liable only for sales taxes owed to Massachusetts. They would have to calculate and remit taxes owed to Tennessee and California and Wyoming and New Jersey, charging different levies for different customers, and somehow keeping up with the ever-shifting kaleidoscope of sales-tax rates, definitions, exemptions, and deadlines.

Yet the owner of the brick-and-mortar shop around the corner would go on as before, charging only a single tax rate and remitting taxes to only a single state.

Supporters of the legislation promise that this will all be less onerous than it sounds. The bill includes simplification mandates such as free tax software, and it encourages multistate cooperation in streamlining tax rates and centralizing revenue collection. MarketplaceFairness.org, a website created to promote the Enzi plan, offers the assurance that with modern technology, Internet retailers have nothing to fear. “Keeping track of a few thousand local tax rates,” it says soothingly, “is no longer an insurmountable technical, administrative, or financial burden.”

For mammoth retailers like Amazon or Walmart, the prospect of juggling “a few thousand local tax rates” may not be an intolerable burden. For countless smaller online businesses, however, it could be the kiss of death. And what happens when the technology turns out not to be quite as cheap and easy as advertised? Writing in the Wall Street Journal last summer, Overstock.com's chairman/CEO, Patrick Byrne, and president, Jonathan Johnson, warned against complacency:

“It took our team of 20-30 experienced IT professionals 9,412 hours over five months to install, test and integrate the software that let us properly calculate use tax in one additional state. The annual software license fees for the first year, the internal and external development and installation costs, and the cost of collateral hardware and software came to $1.3 million. And that's just for one state.”

Whatever inequities exist in the current system, the proposed legislation would be much worse. There's a crucial reason why merchants can only be required to collect taxes for states in which they are physically present: Anything else would be taxation without representation. States must not be allowed to reach beyond their borders, imposing tax obligations on retailers who had no vote or voice in creating those obligations, no political recourse, no opportunity to be heard. Against such unfairness, Americans once fought a revolution. A craving for revenue is no reason to forget that.

(Jeff Jacoby is a columnist for The Boston Globe.)

10 Comments

rippedchef in sc said:

I'm from the gov't and I'm here to help

Wednesday, April 24, 2013 at 4:22 PM

Kevin from Arkansas in USA replied:

And since I have the power to tax then I also have the power to destroy. You can watch it live on the Internet.

Thursday, April 25, 2013 at 7:47 PM

d.w.hudson in Michigan said:

It's just "another way to take more of the already taxed income you earned and waste it and give it to somebody else who will vote for me" tax.

Wednesday, April 24, 2013 at 4:43 PM

Howard Last in Wyoming said:

I am ashamed Enzi comes from Wyoming. I would expect this from a Taxachussetts, Ney York, Kalifornia, Maryland, etc. senator. If he wants to make things fair, just eliminate sales tax all together.

Wednesday, April 24, 2013 at 10:09 PM

READY4ACHANGE in ILLINOIS said:

I want.. I want.. I want...

Thursday, April 25, 2013 at 8:49 AM

wjm in Colorado said:

We are living out Atlas Shrugged, and our government continues to intrude and kill off private enterprise. Join the collective folks, the Constitution had a good run, but it is Over. Get ready for the fall, it is not going to be pretty. I was offered $75.00 for a box of 500 .22LR. That would be a hefty profit, since I bought is for about $14.00 several years ago, but I will forgo profit as this might be a future currency when the dollar is worth less than toilet paper.

Thursday, April 25, 2013 at 11:35 AM

Ct-Tom in NC replied:

Walmart was selling 550 of those .22LR's for $17 less than a year ago. Ain't government great?

Saturday, April 27, 2013 at 8:42 AM

irakiwi in San Diego, CA said:

More unfairness: If a brick and mortar shop sells to a customer for shipment out-of state (e.g., if I'm visiting California from Nevada and I buy a thousand dollars worth of clothing on Rodeo Drive in Beverly Hills for shipment to my Nevada address), I may pay ten or fifteen dollars for shipping but no sales tax ($80) is charged. The merchant is not required to charge and pay Nevada sales tax!

Monday, April 29, 2013 at 12:36 PM

Abu Nudnik in Toronto said:

Isn't it an issue of slavery too? Who pays merchants to do the work of governments? to collect taxes for them? If done without payment and on penalty of imprisonment, how is that not slavery?

Monday, April 29, 2013 at 1:06 PM

p3orion in Midland, Georgia said:

I agree that complying with this would be onerous, but at least one version of the bill exempts any company which grossed less than a million dollars in online sales for the previous year (not that that makes it right from a taxation-without-representation standpoint, or negates the SCOTUS precedents which will undermine it anyway.

But the whole "fairness" case being made for this is based on the fact that online merchants have a pricing advantage since they can avoid sales tax. However, this argument neatly ignores the fact that "shipping and handling," with which brick-and-mortar stores rarely have to contend, often exceeds the cost of added sales tax.

The reason that online merchants' final prices are lower is a matter of overhead that is not spent in maintaining a showroom. But that is hardly a matter with which the government should get involved. As with any other time government intrudes in the free market, the ultimate loser will be the consumer.

Tuesday, April 30, 2013 at 10:27 AM