CHICAGO, IL—To see how the Internet sales tax would affect small businesses, we need only look at Illinois. The President’s home state tried its own “Amazon tax” and had negative results, yet Illinois is the driving force behind similar federal legislation.
Imagine a small online retailer in Champaign-Urbana selling Illini memorabilia to alumni around the country. Right now, it only has to comply with Illinois’s punishing regulations. If Congress passes the misnamed Marketplace Fairness Act, however, that small business would have to comply with the tax authorities of all 46 states that have a sales tax, plus the District of Columbia and all Indian reservations. Talk about a compliance nightmare.
Under current law, states can only force businesses that have a physical presence within their borders to collect their sales tax. So if you are a University of Illinois alum living in Wisconsin, when you buy an Illini shirt from that online business in Champaign-Urbana, it doesn’t collect sales tax from you.
The Marketplace Fairness Act would overturn the longstanding physical presence standard and force online retailers to collect sales taxes based on where their customers live. Should it pass, it would make that Champaign-Urbana business collect Wisconsin sales tax from its Wisconsin customer.
Proponents of the bill say it’s about fairness. They say that because the U of I alum would have to pay sales tax on the shirt if he bought it at a brick-and-mortar store in Wisconsin. But this bill doesn’t level the playing field; instead, it would tilt it steeply against small online businesses in a manner that is anything but fair.
Brick-and-mortar stores would still have to collect sales taxes only where they are physically present. Nothing changes for them. Online retailers, on the other hand, would have to collect in the more than 9,000 sales tax jurisdictions where their customers live. That is not an equal burden.
The Marketplace Fairness Act would be an egregious violation of federalism, because states would be able to enforce their tax laws outside their borders.
It probably comes as no surprise that this terrible idea came from right here in Illinois. Senator Dick Durbin (D-IL) was the power driving the bill through the Senate.
In 2011, Illinois legislators passed the Main Street Fairness Act, also known as the “Amazon tax.” They claimed it would raise $150 million a year in revenue. That law, nicknamed after legislators’ most visible target, required Internet retailers without stores in Illinois to collect the state’s sales tax on purchases made by Illinois residents if they had web-based partners, or “affiliates,” in the state. The Marketplace Fairness Act is simply an effort to make the Illinois policy national.
According to a study by The Tax Foundation, instead of increasing state revenue, the “Amazon tax” did just the opposite. Many of the online businesses newly affected by the legislation responded by ending their affiliate programs in the state. This hurt small Illinois online entrepreneurs who wanted nothing more than to sell their products.
Similar harm will befall small online businesses should the Marketplace Fairness Act become law. They’ll have to figure out how to comply with the sales tax laws of all the states, D.C., and Indian reservations. That isn’t as much of a burden for big online businesses with huge corporate accounting departments like Amazon, Walmart, Target, and Staples. It is a big deal for the Champaign-Urbana t-shirt seller who doesn’t have that advantage.
An Illinois Circuit Court judge found the “Amazon tax” unconstitutional because it overreached its boundaries in trying to regulate interstate commerce. Washington, take note: If you are getting inspiration for a law from Illinois, it is most likely not good public policy. The Marketplace Fairness Act is a prime example.