Top 10 bogus arguments for the Marketplace Fairness Act

Photo courtesy of rentvine.com

Whenever there are tens of millions of dollars worth of lobbying muscle behind a piece of legislation, folks seem willing to say just about anything to make a case for it. The Marketplace Fairness Act, the misguided legislation to allow states to enforce their tax laws on out-of-state businesses, is but the latest example. Here are the top 10 bogus arguments in favor of the bill.

  1. MFA is a “states’ rights” bill – Of all the lame arguments, this one really takes the cake. Senator Lamar Alexander (R-TN) is quite fond of making it, saying things like, “This is an 11-page bill about a two-word issue: states’ rights. States have a right to decide what taxes to impose.” No and no. States do not have rights, states have powers. Powers that we, the people, grant them in order to provide public goods and achieve certain goals. Powers that absolutely should NOT include taxing businesses outside their borders. That is one “right” that states pretty explicitly do not have, as the genesis of Congress’ Commerce Clause power was specifically to prevent states from engaging in damaging attempts to expand their power in such a way.
  2. MFA would close a tax “loophole” - Supporters often say that the MFA exists to close a 20-year old “Internet loophole,” to stop government from “picking winners and losers” among different types of retail businesses. But there is no loophole and government isn’t attempting to advantage one type of business over another. The 1992 Supreme Court decision Quill v. North Dakota is what established current law, which says that a state can only force a business to collect its sales tax if it is physically present within its borders. That’s the law for online and traditional retailers alike.Some, like Walmart, chose a business model that included a physical retail storefront in every state and they’ve benefited handsomely from their ubiquity and uniform shopping experience. Some, like Overstock.com, have chosen a business model that (generally) included a web interface instead of a physical store, with a handful of warehouses across the country to facilitate shipping to consumers. It should be incumbent upon legislators to treat them consistently under existing rules, NOT to equalize their tax burdens at the end of the day.
  3. MFA would “level the playing field” between different kinds of retailers – Once MFA closes this “loophole,” supporters say, we’ll have a truly “level playing field” among different types of retailers. The opposite is actually true. If MFA were to pass, sales made in brick-and-mortar establishments would continue to have tax collected by the simple system they enjoy today: tax is collected based on the physical location of the business, not the residence of the consumer. Meanwhile, for online sales, tax would have to be collected by a dramatically more burdensome system whereby the retailer must quiz the customer about their residence, look up the appropriate rates, rules, and regulations in place in that jurisdiction, then collect and remit those tax dollars to a distant authority to which they’d be subject to audit and enforcement authority.A truly level playing field would extend the easy collection standard for brick-and-mortar sales to online sales as well (or, God forbid, impose the awful and burdensome standard under MFA to BOTH brick-and-mortar and online sales).
  4. MFA’s $1 million small seller exception means only big businesses will have to comply – Another whopper MFA supporters tell is that only really big businesses will have to comply with its mandates since they included a $1 million small seller exception. But if you do some back-of-the-envelope math, the claim falls apart rather quickly. Industry data says that the specialty retail sector (which includes businesses like Bed, Bath, and Beyond and Amazon) enjoys an average net profit margin of just 2.1%, while catalog and mail order retailers (which include eBay and Overstock) average 1.7%. For those of you not quick with a calculator, that means that the average such entity would have only $21,000 and $17,000 left over, respectively, after accounting for all the costs of doing business on $1 million worth of sales. Does a business with $17,000 in profit at the end of the year sound big enough to easily comply with 9,600 taxing jurisdictions across the country?
  5. MFA would eliminate a “haven for tax avoidance” – The National Governors Association has called states without a sales tax (including such Republican strongholds as…Oregon and Delaware) “tax havens.” A sovereign state choosing not to impose a sales or use tax (just as several states choose not to impose income taxes) is not some sort of nefarious or dastardly move. What it is, in fact, is healthy tax competition that many Governors praise in other arenas like corporate tax reform. States experiment with different tax systems (which they can generally only impose on entities physically present within their state) and the result is an incentive structure encouraging businesses and individuals to locate in lower-tax jurisdictions, putting downward pressure on burdens everywhere.
  6. MFA solves tax complexity – The fact that the bill theoretically requires states to simplify their tax systems and then makes them provide compliance software should solve things, right? After all, if we have the technology to make iPads, surely we can figure out how to make some calculations for sales tax. But saying that software can solve sales tax complexity is like saying that TurboTax has solved income tax complexity. Does anyone actually believe that?The challenge inherent in complying with tax rules in 9,600 taxing jurisdictions is not in doing the math. We’ve had the computing power to do that for 50 years. The challenge is in deciding how an item gets categorized for tax purposes. My favorite example when explaining just how difficult this can be is this Wisconsin Department of Revenue memo on the tax implications of ice cream cakes. Over 1,432 words and ten examples, the officials attempt to explain why, for instance, simply handing a customer napkins and utensils when selling them a pre-made cake WOULD subject the sale to tax while giving them the cake alone would not. Good luck getting software to solve that problem for you. Ultimately, humans have to make all of those calls.
  7. MFA will help spur economic growth - Another favorite of mine, the claim here is that by advantaging brick-and-mortar retailers, the MFA will help to create more jobs and economic growth. But of course every dollar that would flow to a brick-and-mortar store would have to flow out of someone’s pocket, and a not-insignificant chunk would go straight to governments. Call me crazy, but I don’t think that giving more money to government is a recipe for tremendous economic growth.
  8. MFA will allow states to raise $20+ billion in revenue – Not likely. As our friends at the Tax Foundation have noted, revenue numbers associated with Internet sales taxes have been wildly exaggerated all across the country. The University of Tennessee study that the $23 billion number comes from is based on old data, back when huge businesses like Amazon weren’t collecting for huge states like Texas and California. Amazon is collecting in those states now, so the untapped stream is much smaller. A Navigant Economics study came up with a much more reasonable number nationwide: $3.9 billion. It’s reasonable to ask whether that amount is even enough to offset the costs of providing sellers with compliance software.
  9. MFA will not set us on a slippery slope to states taxing across borders – If MFA doesn’t set us on a slippery slope, then its drafters wouldn’t have seen fit to include Section 3(c). The language insists that the bill, in and of itself, doesn’t effect matters like licensing and regulation or other taxes. The fact that they had to put this limitation in makes clear that they acknowledge the likelihood of states attempting to expand their powers in other arenas. This section tries to prevent them from using MFA as a legal basis for that, but it sure as heck doesn’t prevent them from using MFA as a political basis for it. In my mind, it’s only a matter of time before states begin demanding a proportional share of business income taxes from out-of-state business as well. After all, they’ll claim, if business X is selling 10% of their goods into my state, shouldn’t we get 10% of their business income taxes?What’s even worse is that MFA is pushing us down a slope that was already pretty slippery to begin with. Last year’s Business Activity Tax Simplification Act sought to strengthen physical nexus requirements for business taxation precisely because some aggressive states were harassing businesses without substantial presence within their borders. The Mobile Workforce State Income Tax Simplification Act (which passed the House unanimously last year) similarly strengthened restrictions on states imposing taxes on individuals who are present in their states for fewer than 30 days. Congress has already seen the erosion of physical nexus in other arenas and attempted to address it, but MFA would do the opposite by wiping it away entirely.
  10. MFA is about protecting Mom-and-Pop stores – This makes for some terrific rhetoric, but it’s laughable to say that Mom-and-Pop stores are the driving force here. I’m sure it’s true that many such businesses want to see the bill passed (after all, wouldn’t you like to be able to burden some of your competitors?), but the only reason this issue has gotten this far in Congress is because of the lobbying muscle of the retail industry. Fresh off of securing price controls on debit card interchange fees, the retail lobby has poured tens of millions of dollars into campaigns run by K Street consultants that claim to speak for “Main Street.” It’s a little ironic, really, given that the biggest threat to Main Street businesses in recent years has been (healthy, desirable) competition from big-box stores that offer lower prices and more selection. I’m sure that Mom and Pop care about the Mom-and-Pop stores, but the big businesses that are fronting the cash for the lobbying campaign sure don’t. They care about their bottom line, and they see this expansion of state government power as a way to bolster it.

The Marketplace Fairness Act is a bad bill being rushed through the Senate in order to avoid appropriate scrutiny. That’s why most conservative organizations, including all of those with real expertise on the design of tax policy, oppose it. Let’s hope that our friends in the Senate and especially the House get the memo.

  • Paul in NJ

    Excellent article, simply outstanding. Now, how do we get our elected Congresscritters to comprehend it?

    • bgmike

      another steaming pile. with all DUE respect, Moylan twists and avoids. As to levellig the playing field, he talks about the tax collection process, not the playing field for businesses. as a retailer who pays taxes, rent and employs people, an online entity that can poacjh my customers by offering them pricing i cannot match with a tax-free environment is not fair. i can make up a lot with customer service, selection and instant gratification, but the government should t be picking and choosing who gets annointed and operate tax free.

      my state and town is losing revenue with every sale i lose. i am not a fan of government – far from it – but that just means they find a new way to tax me, or cut my services while those sales fly away.

      and as for the amll margin that the onliners have? its easy when you plan to operate at just about break even because the government exempts you from the responsibilities most us “real” retailers have to bear. I would like to continue employing people and staying in business.

      • http://rstreet.org/andrew-moylan/ Andrew Moylan

        The playing field for businesses isn’t perfect, but current law is exactly the same for both brick-and-mortar and remote retail sales. If the business has a physical presence in a state, it has to collect its tax. If it doesn’t, it doesn’t. Simple as that. The MFA would alter that landscape to say that a state COULD require tax collection regardless of physical presence for remote sales, but NOT for brick-and-mortar sales. Does that sound level to you?

        Let me put it this way. If you think the MFA is a good idea, why not apply its requirements to brick-and-mortar businesses like yours as well? Instead of charging one tax rate to everyone, that of your physical location, you’d be required to quiz each and every one of your customers about their residence, after which you’d have to look up the rates, rules, and regulations in that district and then remit the dollars to a far-flung tax authority. That’s what you’re asking online sales to comply with. Are you willing to do the same for your business?

        If you’re concerned about your state losing revenue (and that’s not a crazy concern, by the way, lots of states/localities really do have sales tax bases that are dwindling), then starting with online sales is an awfully odd choice. Far and away the biggest contributor to an eroding sales tax base is the fact that virtually all states exempt services from sales taxation. Is it fair that if you sell TVs you have to collect sales tax, but if you sell legal services you don’t?

        At core, this is really a battle between two business models. One that uses brick-and-mortar establishments across the country, fills them with items and employees, and asks you to walk in to buy things, and another that uses a website, and maybe a warehouse or two from which they ship you the items. They each have advantages and disadvantages and I don’t know which one will win out, but one thing I know for sure is that government shouldn’t be in the business of attempting to “equalize” their tax burdensat the end of the day. Government should treat businesses fairly and consistently and let the chips fall where they may. The MFA would put more than a thumb on the scale in favor of brick-and-mortar establishments; it’d be a whole hand’s worth.

  • Jeff Oliver

    NO NEW INTERNET TAX.

  • David Mills

    Yet another way to tax us and burden us with additional reporting requirements that will take away our ability to produce wealth. Remember King George?

  • wayne roberts

    Really good work … thank you. The fabric of America is clearly eroded. This legislation is a perfect example of Republican leaders protecting big business interests and Democratic leaders paving the way to socialism at the expense of middle class consumers and small to medium size businesses trying to stay alive.

  • Jerry Eberwein

    The bill also mandates the states change the laws on certain activities such as the annexation of areas by cities and the changes or establishment of sales taxes by cities and towns within the states. That change is done by the requirement the city or town notify the internet retailer 90 days in advance of the change in tax rate.

    In my state an annexation by a city of an unincorporated area is effective 30 days after the resolution is passed. At that time the sales tax rate for the annexed area changes. Because of the 90 day provision the internet businesses would not be collecting the taxes due to the city for at least 60 days.

    Further, on this subject, the discussion of the database to reflect the various tax collection rates is not updated as regularly as would be required to meet that provision. Here it is updated to include new addresses every six months. Thus, a new address issued would not show up for several months in the database. It will require a revision to the state property database to link the property tax code to the sales tax rate code. The touted use of the zip code is unworkable. The Zip plus four database is subject to two political boundaries, state and national. County, city and town boundaries are not included in the United States Postal Service Zip Code scheme. In my county we have several instances where the Zip Code of a city transcends both the city and county boundaries. Other places in the state the zip of an area of one city is actually located in a different municipality and some towns are actually in the zip code of the abutting major city. One zip code here is actually serving areas in three other counties.

    The lie about less expensive is a favorite of the proponents. However they overlook the fact that the shipping cost oft offsets the saving afforded by the tax break.

    One of the biggest factors for internet sales in the more rural areas is the lack of big store retailers close by. Up to six years ago Wal-Mart’s nearest superstore was 120 miles one way. The local WM was 30 miles away and it was less than 50% of the superstore. Thus the availability of items was special order and two weeks to get it in. The same is true all over the nation as the brick and mortar stores don’t carry a lot of the things the people need or want. So, it’s online for the purchase. The argument about price shopping at BestBuy is bogus. Most or us don’t price shop, we internet shop because the local BestBuy’s don’t have it. And, I’ve had BestBuy staff suggest I get it online (from them) for the very reason that I’ll get it sooner than if they special order it. And, the shipping for the special order is more than shipping to me for an online purchase.

    This bill is not going to achieve the results intended. The true reason is a money grab that will end up being more expensive to the sates than they will reap in cash.

    Having been in the retail business I am aware of the reporting that is required. One thing is the tax collected is a lump payment to the state, but the report is made by the subdividing that amount by tax jurisdiction code. How many hundreds of thousands of those are there in the nation? And, if a customer is charged too much in sales tax the state will have to refund the overpayment; even if it is 1 cent.

  • Hopley Yeaton

    Very informative and persuasive. My primary reason for supporting the tax, at least in theory, is ethical. I’m seeing people regularly using their local stocking retailer of every persuasion as simply a showroom for their internet purchases. I believe that you shouldn’t use the time and inventory of a retailer with absolutely no intention of buying from them.

  • josh

    An unanticipated result of this could be to drive E-tailers offshore where they could thumb their noses at state taxes. Already many items are shipped directly from manufacturers in Mexico, China, ect, so it would be a small step for an advantage of up to 10%.

    It could also create a market for ‘re-shipping’ companies in zero sales tax states that receive goods from E-tailers and forward them to consumers in high tax states for less than state tax would be.

  • Don Jensen

    Mostly bogus arguments.
    Of course it levels the playing field a little bit. And a lot of “brick and mortar” stores suffer from the loss of sales to internet sites after the customer checks out the product in the store. It happens every day in the bookstore my wife works at.
    Shipping costs are added to most internet purchases, not absorbed by the retailer.
    Saw a great bumper sticker yesterday. ” I like to pay taxes. I use them to buy civilization”

  • Pingback: Internet Tax Not A Popular Proposition, According to R Street/NTU Poll

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