The writer, of Lincoln, is an assistant professor of law at the University of Nebraska College of Law.
Internet sales tax is coming! You may have heard about the so-called Internet sales tax bill that Congress is considering (the Marketplace Fairness Act) and how it would spoil the fun of shopping online tax-free.
Competing versions of this federal bill have been circulated for years, but this year's version is getting a lot more attention. This is due in large part to the Senate's recent passage of a nonbinding resolution in its favor. (The House has yet to act on the bill.)
Naturally, opponents have a long list of problems with it.
The Marketplace Fairness Act is labeled a tax increase, an invitation for states to balance their budgets on the backs of nonresidents, an offense against the sovereignty of states and the death knell to tax competition.
To be sure, the legislation raises many issues on which reasonable people can disagree. However, much of the criticism of the act is wholly inaccurate.
Let us quickly dispel three common critiques so that we can focus on the real issues. Would the Marketplace Fairness Act raise or introduce additional taxes? No. Would it allow taxation across borders? No. Would it discourage tax competition by encouraging states to raise taxes on residents of other states? No.
What the Marketplace Fairness Act would do is allow states a different method to collect taxes that are already owed by us, the consumers. Currently, absent special exemption, sales or use tax applies to every purchase or use of a taxable good or service. It just so happens that U.S. Supreme Court case law protects vendors from collecting those taxes if they do not have physical presences in the taxing states.
In those situations, however, we consumers still owe — and have always owed — the same amount of tax to the state. The problem for states is that compliance is notoriously nonexistent, whether the result of ignorance or calculation. When is the last time you voluntarily paid use tax to the state?
The legislation would attempt to remedy our noncompliance by giving states authority to require remote businesses to collect those taxes from consumers at the time of purchase. It would not add any additional tax.
Second, the legislation does not impose any tax on out-of-state people or businesses. The only cross-border activity implicated by the act is the required collection of tax by remote businesses. We can debate the advisability of that tax-collection requirement, but we can't label it as a “tax across borders.” The tax collected would be from those inside the state imposing the tax.
Finally, the argument that the legislation would discourage tax competition and result in states imposing higher taxes on nonresidents rests on the same faulty argument that states would be allowed to tax non-residents. Again, the act would not have that impact. Even if it did allow extra-territorial taxation, the Constitution clearly prohibits states from strategically placing the burden of taxation on nonresidents.
With this pretext set to the side, what remains of the critiques? The most compelling arguments against the Marketplace Fairness Act focus on the burdens that it would impose on remote vendors by requiring them to comply with myriad state and local regulations and tax audit procedures.
We should thus discuss whether the act's simplification requirements and the benefits of technology reduce those burdens to a level justified by the benefits that states provide. We also should discuss whether the act's exemption for small retailers is required, sufficient or properly structured. Those are the areas for real concern.
What we can't afford to do is focus on recycled anti-tax arguments that are inapplicable to this issue. The Marketplace Fairness Act is born from our collective noncompliance, and we should be willing to tackle the real issues.
States' annual revenue losses from consumer non-payment of taxes on remote purchases are staggering — an estimated $23 billion a year. Nebraska's share is estimated at $118 million a year. Something must be done.
Internet sales tax is coming — so let's focus on the real concerns.