Marketplace Fairness Act -- What’s Fair?

On May 6 the Senate decisively (69 to 27) passed a bill that would require online sellers (other than “small” ones) to collect sales tax from remote buyers if they are based in a state with sales tax. The House is about to take up the matter; passage in the House is questionable.

Here are some of the key issues about the law that I think are worth noting and are often overlooked or mischaracterized in serious discussions about “fairness.” I also offer my solution.

The tax is on consumers
Discussions seem to imply that online and mail order merchants are paying the sales tax. This isn’t so. The tax is levied on customers; the merchants act as tax collectors responsible for turning over the collected sales tax to their state.

It is true, however, that the act of collection entails considerable cost to merchants. As things stand now, they would have to compute the appropriate amount of tax. There are more than 9,000 different sales tax jurisdictions in the U.S., so calculation is no small feat. (The bill would require states to simplify their tax rates and provide free software to merchants to compute collections.) Then there are the administrative costs of filing sales tax returns and remitting the taxes.

The tax exempts very small sellers

Under the bill, there is a $1 million pass for online and mail order merchants (“remote sellers”), effectively exempting very small businesses. The collection obligation would apply only if total annual from remote sales exceed $1 million. It should be recognized that bricks-and-mortar stores with sales of $1 million or less are not exempt from sales tax collections.

The law could be better
The Marketplace Fairness Act attempts to right a wrong; that the absence of sales tax on online purchases drives consumers away from Main Street and to the Internet or mail order catalogs. It makes sense to me that all businesses, large and small, wherever based, should be subject to the same rules. However, a better solution would be to simplify the tax rules for all merchants. Let states that want to use the new law (if enacted) enable merchants to collect sales taxes at a flat rate (if the states in which they are based impose a sales tax). Then let the states sort out how to apportion that tax among its cities and counties.

It’s always hard to use the words “tax” and “fair” in the same sentence. I don’t want consumers to lose sight of their added sales tax burden if the law is enacted. Many who have enjoyed sales tax-free online purchases will have to factor in the new tax cost to their spending. The revenue that the online merchants have been reaping has always been subject to income taxes (assuming they are in states with an income tax).

Will this impact overall sales and have a negative effect on the economy? Will it depress total tax collections (income tax and sales tax)? Who knows?

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