The Myths and Realities of “The Marketplace Fairness Act”

The Marketplace Fairness Act is being bounced around once again, this is the proposal to allow States to require businesses to collect sales tax on all items sold via internet and catalog. The National Taxpayers Union reports several myths have cropped up about the bill and what it would do.

Some people claim that allowing States to require businesses from outside its jurisdiction to pay taxes for anything shipped into the jurisdiction is a “State’s Rights” issue. That is 100% false. The NTU reports “[g]iving states the power to collect sales taxes across their borders isn’t about states’ rights, it’s about state coercion. Governments would have fewer incentives to keep their own tax rates low, eroding the important federalist principle of tax competition.” Allowing States to tax items shipped into it could theoretically allow the States to tax those items at higher rates than items purchased within the State. Thus, harming any business that relies on online or catalog sales.

Other myths claim online stores receive a special tax loophole and that such a tax would “level the playing field.” Again, both are false. NTU reports the so-called loophole “is actually the physical presence standard, a firmly grounded constitutional doctrine the Supreme Court has upheld for decades to protect businesses and their customers from predatory tax administrators.” The bill would also “require remote sellers to collect sales tax on every item, it would force them to do so by a completely different and harsher set of rules than currently exist for brick-and-mortar sales… forcing online retailers to quiz each and every customer about their residency” in order to comply with more than 9,600 separate sales tax jurisdictions across the country. Does that sound like “fairness” to you?

The Marketplace Fairness Act is NOT fair and if enacted, there will be winners and losers. Among the losers are those customers who prefer to shop online where their purchases are mostly free from sales tax and those smaller companies who will find it difficult and/or expensive to comply. The winners will be the governments that will see an increase in tax revenue and the bigger online companies that will be able to fill the void left when the smaller companies either refuse to sale online or go out of business.