In my first post here at R Street, I’m going to continue beating a drum that I spent a lot of time pounding in my prior work at the National Taxpayers Union: trying to stop attempts to undermine bedrock taxpayer protections by allowing states to impose hugely burdensome Internet sales tax collection requirements.

That’s a really long-winded way of sounding the alarm about two pieces of federal legislation, the largely-similar Marketplace Equity Act and the Marketplace Fairness Act, which would allow states to force sales tax collection requirements upon online businesses that are located out-of-state.

The alarm is particularly necessary given recent news that sponsors are hoping to attach their language to any end-of-year “Taxmageddon” package. I hate to say I told you so, but this is what I’ve been worried about for months now. Everyone in Washington is scheming to figure out how to get their favorite bill or amendment rolled into that year-end package, because if they’re successful, it’s an almost-guaranteed win.

Basically, the bill sponsors and the retail interests that back them know they can’t pass their bills through regular order because there isn’t enough time and support on the relevant Congressional committees to do so. So, smart lobbyists that they are, they’re trying desperately to attach their language to what everyone regards as a “must-pass” vehicle to avoid driving the U.S. off the vaunted fiscal cliff.

The underlying issue is complicated, but the elevator pitch that bill supporters would give you is basically this: When you purchase something in your local brick-and-mortar store, they’re forced to collect state sales tax on the transaction. When you purchase something online, they generally are not required to collect sales taxes (unless the business has a physical presence in your state) and thus have an “unfair” price advantage over brick-and-mortar stores. Therefore, we should pass something like Marketplace Equity/Fairness to allow states to force sales tax collection requirements upon every business, regardless of physical presence.

Here’s why that pitch is not only wrong, but extremely dangerous for taxpayers and the structure of tax policy. The reason that all brick-and-mortar retailers are forced to collect sales taxes while few online retailers are is because of something called the “physical presence standard.” This is a very basic concept, something upon which almost all of our tax code is built, which says that states are generally prohibited from imposing tax collection obligations upon businesses that are not physically located within their borders. This is a common-sense protection that guards businesses from predatory state revenue collection efforts which, if left unchecked, threaten interstate commerce and economic development. The physical presence standard was clarified most recently by the U.S. Supreme Court which, in 1992’s Quill v. North Dakota, ruled that Bismarck officials couldn’t force Delaware-based Quill Corp. to submit to its sales tax scheme because they didn’t have any physical presence in North Dakota.

The Marketplace Equity/Fairness Acts would destroy that key taxpayer protection in a misguided attempt to “level the playing field” between traditional and online sellers. In reality, however, it would create the exact opposite of a level playing field. Brick-and-mortar sales would be governed by a simple sales tax collection requirement based on the single location of the business from which the item is purchased, while online sales would be governed by the rules and regulations of more than 9,600 sales tax jurisdictions across the country based on the shipping addresses of the customers making the purchase.

If traditional retailers had to use the same system they’re trying to impose online, Walmart and Target would be forced to interrogate you at the register as to your home zip code, after which they’d look up the appropriate rates, rules, and regulations for your jurisdiction’s sales tax, which they’d charge to you and then be forced to remit to your home tax authority later on. That Walmart and Target would never agree to such an onerous system is a clear signal of how difficult complying with it would be.

If they’re successful in getting their language included in the Taxmageddon package, whatever that may be, taxpayers will be in a very difficult spot. Particularly if they manage to include a few other legitimate “no-brainer” reforms that have merit and bipartisan support as a way to “hide the football,” so to speak.

For example, there’s widespread support for an extension of the Internet tax moratorium, which will come up for reauthorization soon. There’s broad agreement about the Mobile Workforce Income Tax Simplification Act, a bill (based on the physical presence standard) that clarifies income tax withholding and payment requirements for people who travel for work to other states. It passed the House earlier this year on a voice vote.

The Wireless Tax Fairness Act also passed the House already and simply awaits Senate action. What stops some clever operator in the House or Senate from taking all of those bills (and perhaps a few others) and combining them with the Marketplace Equity/Fairness Act language and saying to leadership: “Don’t worry about this little old package. Just a few bipartisan Internet/tech tax fixes. Nothing to see here, move along”?

Stay tuned for more coverage on this issue here as we near the end of the year and negotiations in Washington continue. And I’d urge you to participate in one of Andrew’s Axioms: Cross your fingers, but don’t hold your breath, that Congress will do the right thing.

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