The misnamed Marketplace Fairness Act (MFA), commonly called the Internet sales tax, recently passed the Senate and awaits action in the House. If it becomes law, it would force online retailers to collect sales taxes from residents in states in which the businesses have no attachment. It would overturn the physical presence standard that has long determined whether businesses need to collect sales taxes in certain states.
In a recent article, former Governor of Virginia Jim Gilmore wrote about the MFA:
In the American marketplace, businesses large and small compete for customers and revenue based on the value proposition that they offer the consumer. Hopefully, they do so in the context of a fair, transparent and predictable tax code that doesn’t pick winners and losers. The Marketplace Fairness Act distorts these principles at the expense of small businesses and for the benefit of large corporations.
A recent survey of consumers by Endicia, an online software company, found that 44 percent of voters indicated they would buy fewer products online because of the Internet sales tax bill. If this bill would cause online business to lose revenue, then why would some of the nation’s largest online retailers like Amazon, Barnes and Noble, and Best Buy all support the bill?
Simple: because the Internet sales tax is what Gilmore calls “an effort by large established companies to erect barriers to entry for the next generation of emerging small business competitors.” These large companies were once start-up businesses just like the ones they are trying to hinder.
The largest 100 online sellers represent 83 percent of all online sales, and most of them also are brick-and-mortar institutions that already have a physical presence in these areas, so they are already complying with the tax codes. The Internet sales tax won’t affect them, but it will badly hurt their smaller competition. No wonder they are in favor of it.
Small businesses will face an enormous compliance burden if they are subjected to the tax codes of 9,646 different jurisdictions. And if they fail to adequately comply with the continuously changing tax laws from all those jurisdictions, they could face audits by 46 states.
The Internet sales tax is bad policy. It would be better for small businesses, the economy, and online shoppers if the House doesn’t follow the Senate’s poor example.
Jack Minor is currently a member of the Young Leaders Program at The Heritage Foundation. For more information on interning at Heritage, please click here.