Don’t sign on to Internet sales tax; Senate bill is bad policy

Citing a new era of Internet commerce, big business and government have teamed to fast track Senate legislation that would allow states to collect sales taxes on companies that reside outside their borders.

But if the Internet is a new marketplace, the idea of taxing interstate commerce is not.

Like state efforts to tax out-of-state mail order companies in years past, the Marketplace Fairness Act – the Internet sales tax – is another ill-advised attempt by revenue-hungry governments to go fishing for more income that will stifle business development and consumer choice. If the Senate doesn’t derail this unwieldy behemoth, the House should.

In the 1992 Supreme Court case Quill Corporation v. North Dakota, the court ruled it unconstitutional (taxation without representation) for states to charge in-state sales tax on transactions involving out-of-state mail order companies.

However, the court did leave the door open for a federal solution under Congress’ Commerce Clause power over interstate commerce.

Fast forward 20 years, and here comes a bipartisan Senate majority’s Marketplace Fairness Act.

The legislation got its name when big box retailers claimed to be at an unfair disadvantage because mail-order companies – Internet sellers, the latest threat – don’t have to pay taxes and therefore have a competitive price advantage. Actually, that’s not true. Companies with a significant online presence must pay sales taxes in the states in which they have physical storefronts.

But how is it fair that the bill forces online companies, and not brick and mortar operations, to pay sales taxes in all 9,600 state and local jurisdictions that levy a tax?

Imagine, for example, an Ann Arbor-based seller of University of Michigan paraphernalia that has buyers in all 50 states. If that small business does $1 million a year in sales (the Senate bill’s tax threshold) it “would now be on the hook for filing tax returns in all 46 states that have a sales tax,” notes Curtis Dubay, a senior tax analyst for the Heritage Foundation. That’s potentially 46 state audits. That’s an administrative nightmare.

This nightmare would be compounded by states that allow local taxing authority. While our Ann Arbor-based e-retailer pays only Michigan’s 6 percent sales tax, it would have to comply with countless tax authorities in, say, Illinois, where every jurisdiction from Chicago to Cook County to the state can levy taxes.

Beware the law of unintended consequences. Instead of leveling the playing field, the Internet sales tax may force small businesses to leave the playing field altogether. Meanwhile, state tax departments hungry for new revenue would grow, employing tax auditors to hunt down businesses around the country.

Big corporations like Wal-Mart (sales: $450 billion) are backing the push for new revenue, since they don’t sweat e-tax collection that would burden smaller competitors.

Also supporting the bill is Internet giant Amazon (sales: $60 billion), which coincidentally sells its own tax compliance software to other merchants. “Big e-retailers like Wal-Mart and Amazon employ armies of accountants to collect sales taxes, answer audits, and so on,” explains Steve DiBianco of NetChoice, a trade group representing companies like eBay, Yahoo! and small e-retailers that are vehemently opposed to the Senate bill.

Governments are better served by attracting Internet businesses rather than concocting new taxing schemes, but critics also propose more modest solutions for collecting taxes as commerce shifts to the Internet.

Sen. Ron Wyden, D-Ore., for example, supports regional compacts where states with similar tax structures help collect one another’s taxes.

Such alternatives are worth studying. The Marketplace Fairness Act is not the answer.