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.
- 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.
- 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.
- 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).
- 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?
- 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.
- 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.
- 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.
- 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.
- 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.
- 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 fee s, 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.
- “average net profit margin of just 2.1%”: http://biz.yahoo.com/ic/745.html
- “average 1.7%”: http://biz.yahoo.com/ic/739.html
- “tax havens”: http://online.wsj.com/article/SB10001424127887324235304578440821327773136.html
- “tax implications of ice cream cakes”: http://www.revenue.wi.gov/taxpro/news/101108c.html
- “Tax Foundation have noted”: http://taxfoundation.org/blog/internet-sales-tax-collections-falling-far-short-experts-estimates
- “Business Activity Tax Simplification Act”: http://thomas.loc.gov/cgi-bin/query/D?c112:2:./temp/~c112qYdPaH::
- “Mobile Workforce State Income Tax Simplification Act”: http://thomas.loc.gov/cgi-bin/bdquery/z?d112:s3485:
- “securing price controls on debit card interchange fee”: http://www.rollcall.com/issues/54_125/-34586-1.html
- “oppose it”: http://www.rstreet.org/wp-content/uploads/2013/04/L13-04-19-Marketplace-Fairness-Act-Coalition-Letter.pdf