Senate Passes Internet Sales Tax

Posted: May 06, 2013 7:23 PM

The so-called "Marketplace Fairness Act" passed the Senate today on a 69-27 vote, meaning that businesses with more than $1 million in sales will be subjected to tax collection laws no matter where they're located in the United States. The bill would give state governments the blessing to collect tax on retailers across state lines.

Andrew Moylan of the R Street Institute ran down some of the major problems with the bill and detailed some of the straw men arguments used by the tax legislation's proponents:

MFA would close a tax “loophole” - Supporters often say that the MFA exists to close a 20-year old “Internet loophole,” to stop government from “picking winners and losers” among different types of retail businesses. But there is no loophole and government isn’t attempting to advantage one type of business over another. The 1992 Supreme Court decision Quill v. North Dakota is what established current law, which says that a state can only force a business to collect its sales tax if it is physically present within its borders. That’s the law for online and traditional retailers alike.Some, like Walmart, chose a business model that included a physical retail storefront in every state and they’ve benefited handsomely from their ubiquity and uniform shopping experience. Some, like, have chosen a business model that (generally) included a web interface instead of a physical store, with a handful of warehouses across the country to facilitate shipping to consumers. It should be incumbent upon legislators to treat them consistently under existing rules, NOT to equalize their tax burdens at the end of the day.


MFA’s $1 million small seller exception means only big businesses will have to comply – Another whopper MFA supporters tell is that only really big businesses will have to comply with its mandates since they included a $1 million small seller exception. But if you do some back-of-the-envelope math, the claim falls apart rather quickly. Industry data says that the specialty retail sector (which includes businesses like Bed, Bath, and Beyond and Amazon) enjoys an average net profit margin of just 2.1%, while catalog and mail order retailers (which include eBay and Overstock) average 1.7%. For those of you not quick with a calculator, that means that the average such entity would have only $21,000 and $17,000 left over, respectively, after accounting for all the costs of doing business on $1 million worth of sales. Does a business with $17,000 in profit at the end of the year sound big enough to easily comply with 9,600 taxing jurisdictions across the country?

The internet sales tax bill split some online retailers down the middle, with Amazon supporting the bill and eBay lobbying against it. Amazon is the country's largest online retailer - and since their infrastructure exists in almost every state already, they're already subject to a lot of same-state sales taxes.

The legislation will now go to the House of Representatives, where anti-tax proponents are more hopeful that the more conservative majority will be able to either delay and fix the bill or kill it altogether.

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