Critics Slam Unfairness of ‘Marketplace Fairness Act’

Critics Slam Unfairness of ‘Marketplace Fairness Act’
March 12, 2013

Matthew Glans

Matthew Glans (mglans@heartland.org) joined the staff of The Heartland Institute in November 2007... (read full bio)

New legislation that would significantly change how customers of online retailers are taxed is being considered in Congress.

S. 336, the “Marketplace Fairness Act,” would expand the ability of state governments to charge sales taxes on purchases from out-of-state retailers, regardless of whether the retailer has a physical presence in the state.

The legislation, proposed by Senators Dick Durbin (D-IL), Mike Enzi (R-WY) and Lamar Alexander (R-TN), has attracted a wide array of critics, who argued in a letter to Congress the Act would override important tax precedents and harm consumers.

The letter was co-signed by several conservative, free market and libertarian groups, including The Heartland Institute, R Street Institute, Americans for Tax Reform and FreedomWorks. The letter argues the Marketplace Fairness Act represents “an enormous expansion in state tax collection authority by wiping away the ‘physical presence standard,’ a baseline protection that shields taxpayers from harassment by out-of-state collectors.”

Advantage to Traditional Retailers

While some supporters of online taxes argue they are needed to restore a balance between online and bricks-and-mortar retailers, the letter argues the Marketplace Fairness Act would give brick-and-mortar retailers a distinct advantage over online retailers.

“Brick-and-mortar sales across the country are governed by a simple rule that allows the business to collect sales tax based on its physical location, not that of the item’s buyer,” the letter states. “Under the ‘Marketplace Fairness Act,’ that convenient collection standard would be denied for online sales, forcing remote retailers to interrogate their customers about their place of residence, look up the appropriate rules and regulations in thousands of taxing jurisdictions across the country, and then collect and remit sales tax for that distant authority.”

“The so-called Marketplace Fairness Act is anything but fair for the marketplace. Giving states a new open-ended power to tax out-of-state residents regardless of physical presence would be a disaster for consumers,” said John Nothdurft of The Heartland Institute in a statement. “Bricks-and-mortar retailers enjoy many basic advantages over other retailers. Driving up the cost for purchases made online or by mail-order will hinder competition and open taxpayers up to a whole new slew of possible taxes.”

‘Damaging Interstate Commerce’

The letter argues the Act could slow the growth of the e-commerce industry, one of the few sectors of the economy that has seen growth in recent years. “Imposing this unworkable collection standard on remote retail sales but not on brick-and-mortar retail sales would not only be unfair, it would result in enormous complexity while damaging interstate commerce. Online sellers would be weighed down by substantial compliance burdens associated with the existence of over 9,600 separate taxing jurisdictions, each with its own unique definitions, holidays, and rates. The bill’s paltry ‘small seller exception’ of just $1 million (when the Small Business Administration sets the limit as high as $30 million in some cases) in remote sales does little to mitigate the damage.”

One aspect of the Marketplace Fairness Act that has been overlooked by many of the bill’s supporters is its effects on consumers. Bruce Edward Walker, telecom policy advisor at The Heartland Institute, contends consumers could end up paying more out of pocket for online products.

“What’s left out of the zero-sum equation of proposed ‘fairness’ legislation is the diversity of the clientele respectively served by online and bricks-and-mortar stores – the customers who would wind up either paying more out-of-pocket for online purchases may opt to forgo the purchase altogether until they find the item they desire at a garage or estate sale,” said Walker. “Then what? A new tax that promises ‘fairness’ for both Internet and bricks-and-mortars businesses by taxing the second-hand market?”

The letter concludes the Marketplace Fairness Act represents a dramatic expansion of state taxing powers while creating real obstacles for the future growth of online markets. “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, while harming a segment (online sales) that despite its dramatic expansion still only accounts for roughly $0.07 of every $1 in retail spending.”

Internet Info

Additional articles examining Internet sales taxes, the Marketplace Fairness Act and the proposed extension of state taxing powers are available at www.policybot.org.

Matthew Glans

Matthew Glans (mglans@heartland.org) joined the staff of The Heartland Institute in November 2007... (read full bio)