Despite what its supporters claim, the reintroduced “Marketplace Fairness Act” is bad news for conservative principles and limited government. If it were to pass, it would tear down the walls that keep state tax collectors from wandering outside their borders while causing serious damage to electronic and interstate commerce. Though there are innumerable problems with the bill, the three most important are as follows:

  1. Countenances enormous expansion in state tax collection authority – The Marketplace Fairness Act would wipe away a baseline protection that shields taxpayers from harassment by out-of-state collectors, the physical presence standard, which dictates that a state can only require a business to collect its sales tax if it is physically present within its borders. This legislation would eliminate that protection for remote retail sales, allowing state tax collectors to target businesses all across the country.
  2. Allows for imposition of an “unlevel” playing field on retailers – Supporters of the Marketplace Fairness Act claim that it would “level the playing field” between beleaguered brick-and-mortar businesses and online retailers. In fact, it would do the exact opposite. Brick-and-mortar sales would be governed by a rule that allows the business to collect sales tax based on its physical location, not the destination of their buyer. Meanwhile, online retailers would be denied that convenient standard and would be forced to interrogate their customers about their eventual destination, look up the appropriate rules and regulations in more than 9,600 taxing jurisdictions across the country, and then collect and remit sales tax for that distant authority.
  3. Creates damaging interstate commerce and compliance burdens – Because they would now have to comply with the complex tax codes in more than 9,600 tax jurisdictions, remote retailers would be weighed down by substantial compliance burdens. In fact, the “small seller exception” in the bill (which is an inadequate $1 million in remote sales when the Small Business Administration definition of a small business is $30 million in sales) is itself an explicit acknowledgment that it will impose significant collection costs and that some should be spared the pain.

In seeking to address the failures of the “use tax” systems employed by states, the Marketplace Fairness Act ends up giving a federal blessing to a massive expansion in state tax collection authority, the dismantling of a vital taxpayer protection upon which virtually all tax systems are based (the notion that physical presence is the appropriate limit for state tax authority), all while harming a sector (online sales) that still only accounts for roughly $0.07 of every $1 in retail spending.

Conservatives and believers in limited government should oppose such efforts and instead pursue a solution like origin-based sourcing, which would allow online sales to use the same collection standard that’s employed for brick-and-mortar sales today. An origin-based sourcing rule would require tax collection for all sales based on the physical location of the seller, not the buyer. This would maintain important taxpayer safeguards while encouraging robust tax competition.

The Marketplace Fairness Act has none of these virtues and should be opposed by conservatives in Congress.

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