The threat of Congress passing damaging Internet sales tax collection legislation grew larger this week, as Senator Dick Durbin (D-IL) has filed his Marketplace Fairness Act as an amendment to an unrelated bill pending before the Senate. I’ve written before about why this bill is such a terrible idea, and about its supporters’ attempts to attach it to other bills because it cannot pass muster on its own. If the legislation was on the floor of either chamber by itself, it would likely fail to secure the votes necessary for passage so now its supporters are desperately trying to latch on to larger vehicles that are considered “must-pass” bills in a last-ditch effort.
Meanwhile, word is that the U.S. Chamber of Commerce, such staunch defenders of free markets and limited government that they vigorously supported the $700 billion bank bailout and the $787 billion stimulus package, will come out with a statement of principles on the matter supporting much more expansive tax collection authority for states. This is puzzling because if anyone should be terrified about a move away from a tax system based on legitimate physical presence and toward one that allows states to tax businesses outside their borders, it should be America’s business community. The Marketplace Fairness Act constitutes a substantial slide down the slippery slope toward a vastly more burdensome “economic nexus” standard for taxation which could extend well beyond the relatively small world of remote retail sales.
How long would it be before special interests lobby Congress to similarly erode the physical presence standard for things like business taxes? Or digital goods taxes? Or certain types of services? The Chamber’s member businesses are well acquainted with fighting against overly-aggressive tax collection efforts from state governments, so it’s perplexing that they would throw in their lot with this kind of an expansion. I suppose it’s a testament to bill supporters’ multi-million dollar PR campaign that they’ve convinced the Chamber to ignore its broader long-term self-interest in order to mollify some members.
In addition to dramatically undermining a fundamental, bedrock principle of taxation (that states can only tax businesses within their borders), the Marketplace bill also imposes a decidedly unlevel playing field. It would require a completely different, and much more burdensome, collection standard for online retail sales than for brick-and-mortar retail sales. Local retail sales would still be governed by the relatively simple rule that they collect sales taxes based on where their business is physically located, not based on where their customer may live. The Marketplace bill would force remote retail sales to jump through hoops in as many as 9,600 taxing jurisdictions across the country by requiring them to collect tax based on their customer’s address. If you tried to impose that same system on brick-and-mortar retailers, they’d scream bloody murder about complexity and they’d be exactly right. Imagine if your local store had to quiz every customer about where they plan to take the items they’re buying and then collect tax based on that location, however distant it may be and however complex its rules and regulations may be.
So, a bill that undermines basic taxpayer protection principles enshrined in our tax code, imposes a different collection standard for different types of retailers, and, oh by the way, likely has substantial Constitutional concerns as well…what’s not to love for conservatives? Sarcasm aside, I do get why some conservatives have looked to this bill as a solution to an issue they probably hear about all the time from their local retail community. But that it addresses the issue doesn’t mean it addresses it in a reasonable way, that it’s a good idea, or that it’s consistent with conservative principles. Conservative principles would dictate a uniform collection standard for all retail sales based on the physical location of the seller (not the buyer). That system is radically simpler, doesn’t undermine important principles, and encourages real tax competition. If Congress wants to address the issue, that’s the avenue they should pursue.