The “lame duck” session of the 113th Congress managed to avoid a shutdown of the federal government, but did not accomplish much else. Among the unfinished business left for the new, 114th Congress assembling this month is the Marketplace Fairness Act (MFA).
The MFA would permit states to require out-of-state Internet and mail order sellers to collect sales taxes if such sellers have annual gross revenues of $1,000,000 or more. The MFA would thus establish parity between such large out-of-state, online sellers and in-state sellers which must collect taxes on their sales because of their in-state physical presence.
Passage of the Marketplace Fairness Act is long overdue. It is neither fair nor efficient that a traditional brick-and-mortar store must collect sales taxes while an out-of-state Internet firm can ship the same products into the state without collecting sales tax because such Internet firm lacks an in-state physical location. While Internet and mail order purchasers are legally obligated to pay use taxes on their purchases, in practice, it is difficult for states to collect these taxes. The MFA would establish a level playing field by requiring large out-of-state sellers to collect taxes owed just as their in-state competitors must collect such taxes.
An interesting development during the 113th Congress was the growing recognition by many Republican lawmakers that the MFA implements conservative values. In the past, Internet firms have denounced the MFA as imposing a “new” tax, a label that is poison in the current political environment. However, as Rep. Steve Womack of Arkansas has recently observed, the status quo permits Internet shoppers “knowingly and willfully” to flout their obligation to pay use tax when Internet sellers do not collect such tax. Such disregard for legal duties, he states, “has never, never been a conservative value.”
Another important development has been the growing recognition by free market advocates that the status quo effectively constitutes heavy-handed industrial policy as the government effectively hobbles brick-and-mortar retailers in their competition with Internet sellers who do not collect sales tax.
A third interesting development has been the convergence of the business models of many Internet sellers and traditional retailers. Internet firms, most prominently Amazon, have sprouted local distribution centers to provide same day (sometimes one hour) delivery of products ordered online. In those states where Amazon builds distribution centers, Amazon must collect sales tax because of its in-state physical presence.
To compete with same day delivery, some traditional retailers are experimenting with Internet ordering. Under these experiments, customers purchase online with traditional retailers and then pick-up their goods that day at the store or have their goods shipped to them that day from a traditional brick-and-mortar location. Thus, the once bright line is blurring between traditional retailers required to collect sales tax and Internet sellers which need not collect tax because they lack in-state physical presence.
As Amazon and other electronic sellers collect sales tax in additional states, it is all the more anomalous for other Internet and mail order companies to refuse to collect such tax because they lack in-state physical presence.
The Marketplace Fairness Act would excuse from the duty to collect sales tax truly small Internet sellers, defined as those firms selling less than $1,000,000 annually over the Internet or by mail order. The only compelling objection to the MFA is that, if the MFA became law, a single dollar sale into a particular state would compel a covered seller to collect that state’s sales tax.
Infrequent and casual sales into any particular state should not trigger the obligation to collect that state’s sales tax. Hence, Congress should amend the MFA to require that an Internet seller need not collect the taxes of any particular state until that seller’s sales have have met some minimum threshold in that state. I would recommend that an Internet (or mail order) seller with $1,000,000 in aggregate sales be required to collect taxes for each state into which it sells $10,000 or more in any year.
So amended, the 114th Congress should enact the Marketplace Fairness Act.
Headline image credit: © hjalmeida via iStock.