That’s Not Fair

Posted on April 25, 2013 by


Economic issues are once again afoot, and, as usual, they are connected to politics.  The Marketplace Fairness Act has been introduced in the Senate and may be voted on this week.  The title of the bill is misleading.  Its supporters argue its purpose is to “level the playing field” between traditional physical businesses and the upstart internet businesses, by allowing states to require collection of sales taxes by out-of-state sellers from a buyer in another state.  To put it more simply, online sellers would be reuired to collect a sales tax on behalf of every taxing jurisdiction in the United States in which a sale has been made to the particular seller, and then to remit those revenues to the respective tax jurisdictions.  This would be required even if the seller had no actual physical presence in the state.  There are about 10,000 taxing unites in this country, local and state governments.  If I own a business and make say 100 sales to people living in 100 different governmental unites, I would be required to calculate, collect and send to someone (this isn’t yet clear yet) those sales tax revenues to be distributed to each of those units. 

Could this be an accountant’s and tax lawyer’s dream?  Maybe.  Could it be the online seller’s nightmare?  Yes, especially the smaller ones.  So what is the purpose of the bill, introduced by the way by a Republican senator Mike Enzi?  Supporters, including President Obama, say it brings fairness to the market because presently sales taxes on online transactions are not paid by customers or collected by sellers, mainly due to a 1992 Supreme Court decision (Quill Corporation v. Heitkamp).  Thus, physical operations do pay a sales tax to the state or unit in which they are located, while online businesses do not collect from their customers except from those who live in and purchase in the seller’s state.  Is this really fair?  There are several arguments which make a good case that this bill is not at all fair, and may well be designed to lessen the competition of smaller online firms versus their larger competitors.  I focus on one argument.

If an online business in Ohio must collect and remit a sales tax from a buyer in say California, say San Diego, to that city and state, what does that city or state provide me in return in the way of services.  They don’t even represent me, let alone give me any police, fire, trash collection, ambulance, or other services.  They simply collect money from me.  And I had thought taxes were paid to fund actual services, but I suppose the Senators no longer believe that.

One might argue that the seller is simply collecting a tax from the buyer, who DOES live in that state and thus owes the tax, and then the seller is acting as that state’s tax collector.  Since when did out-of-state sellers become slaves of another state?  That doesn’t seem quite fair.  Moreover, the calculation and collection and remission costs real money to the seller.  Yet that seller receives nothing from the state.  Finally, because online sellers are competitive too, they may not be able to pass all the sales tax on to their customers.  They would then have to reduce the prices of their goods even further and eat into their already thin profits. 

Let’s all be honest.  This tax is simply a way first to raise more revenue for hungry (voracious) state governments, and second to reduce or even eliminate the competiton that online sellers pose for physical sellers.  The first is legalized greed and the second is in any other context an antitrust violation as well as legalized greed.  I sometimes think Frederic bastiat was a bit too polemical, but on this I would be right with him.  If you get a chance, read The Law, written by Bastiat in 1850.  The practices he excoriates there sound suspiciously like now.  If Bastiat doesn’t convince you, note that the bill is favored by both Republicans and Democrats, by state governors and by large retailers, and not by states having no sales tax.  Hmm.  Now I feel like reading Adam Smith again, just for some peace of mind.  You Smith fans will know aht I am talking about.