Senate Poised to Pass Internet Sales Tax Bill, Kill Healthy Competition

Yesterday, the Senate voted overwhelmingly to allow a vote on The Marketplace Fairness Act, which would allow states to start forcing online retailers with no physical presence in their states to collect sales tax. The vote will happen this week and the bill will likely pass the upper chamber. Estimates suggest some $11 billion is currently escaping the clutches of state and local tax collectors, so we're talking about real cash here.

As the indispensable Declan McCullagh of CNET reports, this effort caps

years of lobbying by the National Retail Federation and the Retail Industry Leaders Association, which represent big box stores including including Walmart, Target, AutoZone, Best Buy, Home Depot, OfficeMax, Macy's, and the Container Store. President Obama also supports the bill, his spokesman said Monday.

As telling, McCullagh notes that the current legislation - which would force all online retailers to comply with variations among the nearly 10,000 tax jurisdictions in the country - is totally different from earlier attempts to apply simplified taxes to online sales.

Eight years ago, Sens. Mike Enzi, R-Wyo., and Byron Dorgan, D-N.D., introduced legislation that would have allowed Internet sales taxes to be collected -- but only after states simplified and standardized their tax systems through a process created in 2000. Enzi said at the time that it was necessary to require "dramatic simplification in almost every aspect of sales and use tax collection and administration" including "a reduced number of sales tax rates" and "reduced audit burdens for sellers."

The current version of S.743, however, lacks those protections. Small sellers with no profits could be subject to audits in dozens of states. Each of the nearly 10,000 local tax jurisdictions could specify a different tax rate. Businesses would also have to figure out how to handle the complexity of integrating as many as 46 state government-supplied software packages into Web ordering systems.

Enzi is in favor of the new bill, as is Amazon (which has already cut deals with various states in which it has a physical presence). The sense is that the massive online retailer can easily handle administrative costs that are a burden to smaller comptetitors.

Apparent from the current bill's lack of simplification, there is a superficial case for treating retailers similarly. Though let's not skip over the maze of state and local anomalies. As McCullagh notes,

In New Jersey, for instance, bottled water and cookies are exempt from sales tax, but bottled soda and candy are taxable. In Rhode Island, buying a mink handbag is taxed, but a mink fur coat is not.

But beyond the superficial case for "equal" treatment, there are real questions about fairness. Back in 2009, Overstock CEO Patrick Byrne talked about this with Reason TV. Internet retailers, he argued, "put a lot lesser load on a local infrastructure than it does to build a Target." That includes not only roads and sewers, but also schools and other buildings that serve employees' kids and the like. And we might add that just as online retailers gain an edge by not charging sales tax, bricks-and-mortars retailers have the edge in immediacy, display space, and other things customers like. Best Buy and Borders (which screwed up its web store for years) didn't come close to going belly up simply because everybody started buying shit online (though such competition was a factor).

Reason columnist Veronique de Rugy and her Mercatus Center colleague Adam Thierer have also noted that The Marketplace Fairness Act is premised on the idea that "the the government should be able to collect the maximum amount of tax revenue from citizens, and that consumers should not be able to decide where to shop based on tax levels." They actually present a different way of thinking about the sales tax issue that deserves more attention.

Tax competition is a good and healthy thing, as it helps to spur innovation in both the public and private sectors and enhances various "experiments in living" different jurisdictions and communities want to pursue. Residents benefit from being able to choose among different attitudes toward the level of taxation and (one presumes) the level of public services they pay for.

De Rugy and Thierer suggest that taxing goods and services at the point of origin rather than the point of definition is an easy way to keep tax competition thriving. Instead of taxing online sales based on where the customer lives, tax the purchase where the vendor is. That would not only simplify the vendor's calculations (he/she would only need to know one tax code), it would allow for exactly the sort of competition that helped create differential jurisdictions in the past that helped nurture catalog sales and online retail.

The good news for those opposed to the Senate plan? The House is unlikely to pass similar legislation.

Watch Patrick Byrne (who holds a Stanford Ph.D. in philosophy) talk taxes, short-selling, and Robert Nozick:

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  • ||

    In before the thread gets tulpical.

  • sarcasmic||

    Supposedly he took his ball home. We can only hope.

  • Almanian!||

    You'll miss him. One day. Really. No - REALLY. You'll miss him.

  • ||

    But who will be here to tell us how unfairly brick and mortar places are being treated?

  • WTF||

    Okay, who made Tulpy cry?

  • Hyperion||

    Really?

    All I know is that for a supposed Libertarian, he has a very broad array of statist views, and that he pretty much hates me.

  • Auric Demonocles||

    I missed that. What was the thread that sent him off about?

  • Jordan||

    Ask and ye shall receive. Behold the butthurt.

  • ||

    It was this thread about a man being jailed for cartoon pixies because of the supposed child pron angle.

    The actual argument came about over differential reactions in the media to criticism of Islam and Christianity. Things got tulpical, and went downhill from there. Later in the thread he declared he was gonna take a break from the Reason comments and hoped we would miss him in a couple of months for his valuable contributions (seriously!).

  • ||

    Say what you will about Baconator (seriously, say whatever the hell you want) -- at least he takes the abuse like a man.

  • ||

    The who? Is that your nickname for Tulpa?

  • ||

    OH, DUNPHY. Nevermind.

  • Auric Demonocles||

    I don't know if calling every bigots is "taking it like a man".

  • ||

    That's just what I'd expect the bigoraty to say.

  • Brandon||

    Sounds like Tulpa was planning on taking a vacation, probably to some walled, well-surveilled city where he won't have to fear guns on t-shirts, and he wanted to make sure that everyone would note his absence.

  • robc||

    He will tell us how easy sales tax is to program in.

  • Hugh Akston||

    But beyond the superficial case for "equal" treatment, there are real questions about fairness...Internet retailers, he argued, "put a lot lesser load on a local infrastructure than it does to build a Target."

    That assumes that fairness is part of the equation. More likely it's just a case of who has the better lobbyists plus Congress wanting their piece of the action.

  • VG Zaytsev||

    Back in 2009, Overstock CEO Patrick Byrne talked about this with Reason TV. Internet retailers, he argued, "put a lot lesser load on a local infrastructure than it does to build a Target." That includes not only roads and sewers, but also schools and other buildings that serve employees' kids and the like.

    Sales taxes are theoretically a consumption tax used to fund local services. Therefor, the burden imposed by the seller on local infrastructure is irrelevant.

    Besides which, consumption taxes are less economically destructive than income taxes.

  • robc||

    Besides which, consumption taxes are less economically destructive than income taxes.

    You sure?

    Both have a deadweight loss.

    Now, Single Land Tax....

  • UnCivilServant||

    Remove all taxing power from localities. And especially abolish all sales taxes.

    It's as pointless and innane as the "Vlue Added Tax" which is sales tax gone rabid.

    Don't replace it with anything - just force the Pols to work with less. (Also, no borrowing for you, government)

  • RightNut||

    The good news for those opposed to the Senate plan? The House is unlikely to pass similar legislation.

    Thank god for that, and a thousand other pieces of terrible legislation that will get blocked by the House.

  • James Anderson Merritt||

    Is there already similar legislation in the House? If so, what is it? If not, what about the Constitutional requirement that money bills (which should certainly include taxes!) originate in the HOUSE? I can understand why the Senate might be leading the cheers for this noxious tax, but I can't understand why they would advertise taking the LEAD on its passage, when the Constitution explicitly seems to direct otherwise.

  • VG Zaytsev||

    The sense is that the massive online retailer can easily handle administrative costs that are a burden to smaller comptetitors.

    Apparent from the current bill's lack of simplification, there is a superficial case for treating retailers similarly.

    They could have made this bill less crappy by including a sales threshold for each tax jurisdiction before making the seller subject to sales tax for shipping to that jurisdiction. The burdensome part for small retailers will be obtaining sellers permits from all of the taxing entities and then filing 'returns' for those entities. Calculating and collecting the tax will be the easy part.

  • Scruffy Nerfherder||

    This. As a brick and mortar retailer who is looking at selling specialty products over the internet, this absolutely sucks balls.

    The taxmen never think about the administrative cost of compliance with the myriad rules, and certain states are freaking horrible in regards to complexity.

    Next up, VAT, just because it's not complicated enough yet.

  • johnl||

    They know exactly what the administrative costs are. It's Amazon and software vendors who are pushing this because it's going to make a lot of money for vendors and give an advantage to Amazon.

  • Scruffy Nerfherder||

    I'll give you that. The taxmen know, but the politicians don't have a clue because most of them never ran a successful business in their lifetimes. And more regulation to an attorney is just more money to be made.

  • mauricegirodias||

    Umm, that's true. Of course, those of us who sell digital products will just offshore our servers and payment processors. Ebay's already kinda letting you do this (you can accept payments in currencies other than U.S. Dollar, and have separate "accounts" with pounds, euros, AUD, what have you. So it won't show up on the 1099...)

  • Fist of Etiquette||

    The sense is that the massive online retailer can easily handle administrative costs that are a burden to smaller [competitors].

    Well, that's the point of these kinds of federal regulations, isn't it? Large corporations have their lobbyists explain to Congress that they the resources to absorb these artificial costs of doing business, through law and accounting firms already on the payroll, that small business cannot. It helps bury the competition.

  • Almanian!||

    No good deed will go unpunished.

    RELEASE THE KRAKEN!

  • sarcasmic||

    It's almost as if the government is trying to stimulate the economy by increasing the cost of doing business.

  • Smilin' Joe Fission||

    This is why we need QE!

  • The Late P Brooks||

    "If we hit the goose harder, it will lay more and bigger golden eggs!"

  • UnCivilServant||

    "Is it supposed to be bleeding?"

    "Nevermind that, keep hitting it!"

  • AlmightyJB||

    Who could be against "Marketplace Fairness". Only evil CORPRASHUNS and the KOCHTOPUS.

  • The Late P Brooks||

    Let us not forget the economically sophisticated argument which usually arises in these sorts of conversations: "They're taking money out of our community!"

  • Fist of Etiquette||

    But Sen. Dick Durbin, D-Ill., said the bill requires participating states to make it relatively easy for Internet retailers to comply. States must provide free computer software to help retailers calculate sales taxes, based on where shoppers live. States must also establish a single entity to receive Internet sales tax revenue, so retailers don't have to send them to individual counties or cities.

    "We're way beyond the quill pen and ledger days," Durbin said. "Thanks to computers and thanks to software, it is not that complex."

    Like you know fuckall about these kinds of burdens on small business, Durbin. I'm sure there's no way online retailers will have to continuously defend themselves from jurisdictions that fail to make for easy compliance.

  • Scruffy Nerfherder||

    "Thanks to computers and thanks to software, it is not that complex."

    Fuck them. Do you think Amazon is going to get audited by every other state and city? Meanwhile, the jurisdictions are going to start hiring auditors whose sole job is to travel and find small to mid-size out-of-state online retailers and fuck them good and plenty. Having dealt with these types of audits before, I can tell you they're time-consuming, expensive, and a pain in the ass.

  • Scruffy Nerfherder||

    In fact, I bet this will create a market for private auditors who get paid a percentage of reclaimed sales taxes.

  • JW||

    Those are good, American jobs, pinko.

  • mauricegirodias||

    Yep.

  • Rights-Minimalist Autocrat||

    Stimulus!

  • dalewalt||

    Is this 'free computer software' also going to integrate with every possible accounting package used by small business?

    And I imagine that most states are going to have their own version of the 'free computer software' that will need to be integrated/managed/used by the internet retailer.

  • Dr. Frankenstein||

    To have some real fun I should be allowed to use the tax rate of the local where I order the goods from on my laptop. Yeah Lake County screw the Cook County taxes.

  • Lord Humungus||

    At my job have a fairly expensive piece of software to calculate the different taxes - city, municipal, county, state, etc. The software must be updated quarterly to keep up with the various changes. Extracting information - if someone wanted a breakdown - is near impossible as I found out when another customer required that information on an electronic invoice. Instead the program just spits out a lump tax amount.

    If I was a small-time business owner... yikes.

  • Smilin' Joe Fission||

    The amount of capital wasted on tax code and tax enforcement is incredible. It's sad really.

  • DaveSs||

    Tax software that reports lump sums was the bane of my existence when I worked in SUT compliance.

    Even more fun when the city has several tax districts within it where the district boundaries only cover part of the city.

    We had a pretty sophisticated system for splitting those lump sums apart so they could be remitted to the proper jurisdiction. However there were a handful of cities where it was nearly impossible to do.

    The real shitty part is when our customers had only a handful of customers in one of those screwy districts. After you factor in our charge for preparing the return, cutting a check, and mailing the return, they basically had to take a loss on those customers in order to comply with the tax laws.

  • Jam||

    this looks like a good first step towards a VAT

  • TheZeitgeist||

    In other news, the built-for-internet taxless Bitcoin currency has crawled back up to $135.

  • ||

    Worse, how are each of the local tax jurisdictions going to KNOW if someone buys something off an out-of-state website and doesn't pay sales tax?

    What are we going to have some massive database monitoring all online sales ? Is your startup website for your garage business going to have to report all sales in all states and localities to the IRS, so they can distribute information to government in other states, so they can send you audit letters demanding you pay up?

  • Scruffy Nerfherder||

    I imagine the major online retailers will play ball and help the states and localities out in this respect.

  • Scruffy Nerfherder||

    Actually, I'm pretty sure I know how the states will target retailers, at least initially and until there are contractors who will find them for them.

    When a person buys something over the internet and pays no sales tax, that person is legally required to pay "use tax". Use tax is the same as sales tax, except that it is supposed to be paid by the buyer, not the seller.

    Having been audited on my sales taxes before, I found this out. After they found that I was accurate to the penny on several million dollars worth of sales, they asked for my credit card records. Every online transaction I made was examined and it was decided that I owed "use taxes" on a few thousand dollars of purchases.

    In the future, these types of audits will naturally progress to the seller being audited afterwards.

  • VG Zaytsev||

    Every online transaction I made was examined and it was decided that I owed "use taxes" on a few thousand dollars of purchases.

    So they spent tens of thousands of dollars in audits to collect a couple hundred dollars worth of use tax.

  • UnCivilServant||

    That wasn't the point, the tax evader had to be punished!

  • ||

    Keeping track of 10,000 local jurisdictions sales tax rates and paplying them appropriately, would require a small online retailer to buy expensive software to apply and collect those taxes and then send them to the appropriate jurisdictions.

    Instead of a web store being a simple matter of exchange, it now becomes a complicated process of sorting out who should be taxed what and sending checks to 10,000 jurisdictions. This will inhibit many individuals from starting small web-based businesses.

    Now I see why the big-box stores like this bill.

  • Hyperion||

    This bill will have several effects, none of them good. But the main intention of the bill, IMHO, is to drive small internet businesses out of business. More cronyism.

  • VG Zaytsev||

    That seems to be the intent, but it will be unenforceable.

  • robc||

    This is what the Commerce Clause is supposed to prevent. Not the bullshit it is used to justify.

  • Scruffy Nerfherder||

    Never underestimate the willpower of all the government trying to fuck over the little guy in favor of the big guy.

  • Mr. Soul||

    that truth transcends all.

  • robc||

    Does any state not have a use tax clause?

    I know in KY, Im supposed to report on my income tax form the untaxed out-of-state purchases I made and then pay the proper KY sales tax on them.

    So that money is already being collected.

  • Scruffy Nerfherder||

    See my post above. The states hate use taxes because the payers are distributed and hard to chase. Meanwhile, those retailers are oh-so conveniently registered with the government and already collecting several types of taxes.

    Business license = Government permission to make a profit in exchange for being a tax collector and regulatory enforcer

  • Auric Demonocles||

    I know both VT and MA have these. As far as I know no one puts anything in there.

  • dalewalt||

    "Tax competition is a good and healthy thing, as it helps to spur innovation in both the public and private sectors and enhances various "experiments in living" different jurisdictions and communities want to pursue."

    Nick, really? You want to rely on tax competition to spur innovation? How, exactly does tax competition do this? And why the fuck do I care about 'experiments in living' in different jurisdictions? Do you think a large number of people are going to choose jurisdiction A over jurisdiction B, just cause the first jurisdiction has a volunteer fire department while the second has a paid one?

    More gummint regulations. Wonderful.

  • DaveSs||

    I specifically chose where I live because its in an unincorporated area and thus significantly lower property tax burden.

    Same size house two miles down the road pays twice what I pay.

    If I'm still living there and the city decides they want to annex my area I'm going to raise hell.

  • dalewalt||

    I'm with you; I chose where I *live* based partly on taxes, but where I shop online? uh, not so much.

  • T||

    I do. I've switched away from Amazon for large purchases because they charge me sales tax. Small stuff I still buy (prime, FTW) but bigger purchases go elsewhere. 40 bucks is 40 bucks, man.

  • anon||

    Nick, really? You want to rely on tax competition to spur innovation? How, exactly does tax competition do this?

    It already does. See: EU vs. US.

  • dalewalt||

    Oh,and this 'free computer software' from the states... is it going to be as easy to implement as HC exchanges?

  • ||

    Single land tax to fund a minimal government with a refund of all surpluses when the debt is paid down. Driver's licenses and provision of most government services contingent on filing of tax. That is all.

  • kfs||

    How the hell does a taxing authority of one state have jurisdiction in another state? If a NY state tax auditor came to my business in Idaho to audit me for sales tax compliance, I would politely tell them to GO FUCK THEMSELVES!

  • Scruffy Nerfherder||

    The states are cooperating with each other to fuck everyone.

  • Scruffy Nerfherder||

    Actually, that's what the bill does. It gives the states the right to pursue sales taxes across state lines.

  • Zeb||

    That's my question too. If the states want to get their sales taxes (or use taxes or whatever), they should figure it out themselves, not force businesses to act as their tax collectors when they have no presence in the state.

  • anon||

    Know how they could make this bill less shitty?

    Burn it.

  • anon||

    More seriously though, the only way this could work would be a federal sales tax on online sales. Definitely not supporting a measure, but realistically it's the only way to implement such a tax. There's simply no way to reconcile the very very many different tax codes around the country.

  • Scruffy Nerfherder||

    There's simply no way to reconcile the very very many different tax codes around the country.

    I don't think they care in the least.

  • sarcasmic||

    There's simply no way to reconcile the very very many different tax codes around the country.

    I believe that is the point.

    Baptists and Bootleggers.

    In this case the Baptists are the state governments who want to fix the "problem" of people engaging in commerce without paying a fee, and the Bootleggers are the large companies that can absorb the compliance costs that will force small businesses to shut down or never open in the first place.

  • ||

    The Marketplace Fairness Act

    Has to be the most Randian (as in the author, not the reason commenter) name for a bill I have ever heard.

  • ||

    I'm sure this "free software" will all be open-source under a broadly-compatible license like MIT or two-clause BSD; run cross-platform without depending on any proprietary SDKs or operating systems*; and that all states' packages will expose a unified, well-documented API.

    *and though it's more egregious to force a Linux shop to use Windows for some of its software (for instance), it's not like forcing a Windows shop to use Linux is cost-free

  • DaveSs||

    There is actually a semi standard format for remitting the information.

    Illinois, Texas and a few other states all use the same file format. The standards are readily available.

    Even if the remittance problem is simplified, you still have to figure out what rate to charge a customer.

    Knowing the customer's zip code is not enough.

    My zip code for example exists in two different counties and includes both incorporated and unincorporated areas. So depending on where in my zip code you live you could have one of four different tax rates.

    Special taxing districts are even worse.

  • VG Zaytsev||

    In CA, shipments originating in one jurisdiction but shipping to another, where the retailer has no physical presence, are subject to the state's portion of the sales tax (6%) and not the local portion (2%+), although the merchant can collect the amount for his location and remit the total to the BOE for the sake of simplicity.

  • DaveSs||

    Ya, some states do require charging only the state portion.

    The rational of this bill though is that 'Main Street' is getting screwed by people who shop online. Those local sales taxes not being paid means we have to lay off teachers blah blah blah.

    If only the State portion of the tax is collected, then 'Main Street' is still getting screwed unless the State decides to allocate the tax received. But they can't really do that fairly unless they know where the customer is located.

  • ||

    Interesting. What is the software itself typically like?

  • DaveSs||

    What the states have is not really software, its just a plain text file that is formatted according to a published specification.

    The state lists approved software vendors/transmitters.

    What each 3rd party vendors software looks like largely depends on the type of businesses they support.

    Commercial software for say a small retailer with only a handful of fixed location stores might be as simple as import an excel file with the location of the store, revenue at that location, etc.

    Software for larger companies would generally be done through an approved transmitter, or that company would use their own IT resources to design in-house software to transmit.

  • Emmerson Biggins||

    (Entirely theoretical question, I know) : Anybody have any arguments pro or con on the constitutionality of this?

    I'm inclined to think it is actually constitutional. This is actually interstate commerce. I'm not sure if "regulating interstate commerce" should really be extended into a general taxation power, and I'm not sure if that is really what is happening, but I'm so flabbergasted that the interstate commerce clause might be applied to actual interstate commerce, that I don't have lots of pre-existing thoughts on this.

    Disclaimer: It's a completely horrible idea from an economic perspective. Take the one most innovative piece of the American Economy from the last 20 years, and instantly saddle it with millions (? probably) of pages of red tape. That will be rarely, but arbitrarily and hamfistedly enforced by the Federal Government. Great idea.

  • DaveSs||

    I don't have any evidence, but I suspect think the expansion of commerce made possible by the internet more than offsets any supposed 'loss' due to unpaid sales tax from internet sales.

  • lap83||

    Agreed.

    On the bright side, if this passes and our economy really tanks...maybe more people will realize internet commerce was the only thing keeping it afloat.

    Ha, who am I kidding. It will be alternately blamed on "austerity" and obstructionist rethuglicans.

  • The Late P Brooks||

    I know in KY, Im supposed to report on my income tax form the untaxed out-of-state purchases I made and then pay the proper KY sales tax on them.

    So that money is already being collected.

    I laughed so hard I hurt myself.

  • Enjoy Every Sandwich||

    And then every time another tax gets piled onto the American people, dimwit politicians and pundits go on the TV to say "gee whiz why aren't consumers spending? Must be Keynesian animal spirits! Need more gubmint stimulus..."

    No, dumbfucks, it isn't animal spirits, it's arithmetic. I have less disposable income and the goods I'm trying to buy are more expensive. And having the politicians in D.C. give more money to their pals doesn't stimulate anything except limo sales and call girls.

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