Issue: S. 743 Marketplace Fairness Act, as amended. A bill to restore States’ sovereign rights to enforce State and local sales and use tax laws, and for other purposes.
Result: Passed in Senate, 69 to 27, 4 not voting. GOP and Democrats scored.
Bill Summary: S. 743 authorizes state governments to collect sales and use taxes from remote retailers, particularly online retailers, with no physical presence in their state. To exercise such authority, a state must either be a member of the multi-state Streamlined Sales and Use Tax Agreement and that Agreement comply with minimum simplification requirements of the Act, or a non-member state must adopt those minimum simplification requirements.
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Analysis: S. 743, often referred to as the “internet sales tax” would require all “remote sellers” (including online stores) with $1 million or more annual gross receipts to collect taxes for every state and jurisdiction where they have customers.
We object to the “internet sales tax” on both constitutional and policy grounds.
The “Interstate Commerce Clause” (Article 1, Section 8, clause 3) states that Congress shall have the power “to regulate commerce … among the several States….” Federal officials have abused this clause, perhaps more than any other, to enlarge their authority, claiming the clause gives them power over virtually every area of private business.
Under the Articles of Confederation states had often sought to prevent competition by restricting interstate commerce via taxes and by other means. The framers put the clause in the Constitution for the exclusive purpose of preventing this practice of the states. They certainly did not intend to authorize the federal government to interfere in private business activities. Extending state taxing authority beyond state lines is a step backwards to the days prior to the Constitution.
According to Forbes (6-22-13): “The legislation in its current form does not require the various states to use the same definition of what is taxable and what is not, the same tax holidays, tax forms, etc. This puts the burden on retailers to comply with the laws of 9,600 jurisdictions, to file monthly tax returns with 46 states, and to be subject to audits by states and localities in which they have no physical presence or representation…. Right now, every state and many municipalities set their own sales tax rates, and rules for what is taxable, as well as reporting requirements.”
If a company has a physical presence in a jurisdiction, it normally collects any taxes due from the purchaser and remits them to the taxing authority. If it does not, the individual consumer in most states is obligated to pay the tax, as a use tax, often when the consumer files an annual state income tax return. However, many consumers fail to do this, which supplies one impetus for states to ask the federal government to intervene and authorize states to collect from the out-of-state companies doing interstate business.
The “Marketplace Fairness Act” is advertised as “leveling the playing field” between local retailers and online giants. However, as so often happens with legislation today, the reality can be quite different. The administrative burden of this law on small and medium-sized businesses would be huge, not to mention its negative impact on start-ups. (A $1 million sales exemption is not very large given business profit margins.) As with so much government regulation, the effect is to consolidate power in the big guys who can afford an army of accountants and a department to comply with complex regulation.
Although the proposed small business exemption is already onerously low, history suggests that future government action (such as with the income tax) would inevitably lower the exemption. And inflation would automatically serve to bring more small businesses under the regulation.
In addition to the desire of states for more revenue, there is another factor that Americans should consider — the century-old drive to build a regulatory state. The enormous cost to the American economy of government regulation has been well documented. However, corporate giants often support more government regulation, as it tends to eliminate the competition of smaller companies that are less able to handle the administrative burden.
In his important 1963 classic, The Triumph of Conservatism — A Reinterpretation of American History, 1900–1916, economic historian Gabriel Kolko wrote:
“Competition was unacceptable to many key business and financial interests …. As new competitors sprang up, and economic power was diffused through out an expanding nation, it became apparent to many important businessmen that only the national government could ‘rationalize’ the economy. Although specific conditions varied from industry to industry, internal problems that could be solved by political means were the common denominator in those industries whose leaders advocated greater federal regulation.” (Emphasis added.)
Industry gets the monopoly, while government gets the power. Senator Ted Cruz (R-Texas), who voted against the measure, agrees:
“Make no mistake: Big business supports this bill because it will drive smaller competitors off the Internet and out of business.
“And it wouldn’t help small brick-and-mortar retailers, as its proponents claim, because the sales they are losing today are mostly going to big-box stores and giant online retailers — both of whom are already paying sales taxes.
“The largest online retailers already have physical business presences in most states. Meaning, they are already collecting and paying the state taxes. Right now, nine of the top 10 Internet retailers collect taxes in every state. Big businesses can afford to hire accountants and attorneys to pay the taxes properly and navigate audits.
“Instead, this bill would just impose crushing new costs on small and mid-size Internet retailers.” — realclearpolitics.com (May 5, 2013)
Indeed, some have suggested that the excessive burden in complying with the tax requirements could induce businesses to relocate outside the United States. As a result, another opponent of the measure, Senator Ron Wyden (D-Oregon) termed the tax the “Shop China Bill.”
We have assigned (good vote) to the Nays and (bad vote) to the Yeas. (P = voted present; ? = not voting; blank = not listed on roll call.)