(Photo credit: echobase_2000)

Last week, the US Senate passed the Marketplace Fairness Act, otherwise known as the Internet Sales Tax. While the odds are against its passage in the House, it does have some bipartisan support. Opinions are wildly divergent on the bill, but I for one think the internet sales tax is a bad idea and a bad law.

The Marketplace Fairness Act would require online retailers to collect sales taxes for the buyers state. Sellers with under one million dollars in sales would be exempt. In exchange for receiving extra sales tax revenue, states would have to streamline their sales taxes according to the Streamlined Sales and Use Tax Agreement (SSUTA).

Previous Supreme Court decisions weigh against the internet sales tax

Legal precedent weighs against this bill. 55 years of case-law, including a Supreme Court decision in 1967 and again in 1992, show that while a state can require sales tax to be paid from all purchases, catalog and online sellers who are not physically present in the state are not required to collect those sales taxes.

While passing laws to contradict Supreme Court rulings is part of the checks-and-balances of the US governmental system, this law is a sudden about-face from a 1998 attempt to ban states from taxing the internet. The Internet Tax Freedom Act has been continually extended since it’s passage and is currently in effect until 2014.

Streamlined Sales taxes hurt development in economically depressed areas

One reason that the Supreme Court had previously ruled against an internet sales tax was the added complexity of accounting for all of the varied sales tax laws across the 45 states that collect sales tax. Not only does each state have a different base rate, but many states have different rates for different parts of the state. Plus, different items can be exempt from tax (commonly unprepared food items), or have a different sales tax rate. Examples of different rates for different items include hotel taxes, tire taxes, telecommunications taxes, and the sale of marijuana in Colorado. Finally, some states will occasionally hold sales tax holidays to spur spending.

None of that qualifies as very streamlined. According SSUTA, states must use a single tax rate across all jurisdictions, items, and days of the year. This means that areas that have traditionally gotten preferential tax treatment from their states would lose it. No longer could a state try to promote growth in its inner cities by creating “Enterprise Zones” with a lower tax rate.

Local sales taxes are ignored by the internet sales tax bill

The Marketplace Fairness Act specifically bans local governments from collecting internet sales tax (Section 2 (b)(1)(A) Paragraph 2). The SSUTA also requires that all sales tax collection for a state be done by a single state entity. Since SSUTA also requires that sales tax rates be uniform, there is no way that a state could actually allow municipalities and counties to charge sales and use taxes.

If the reasoning is that is unfair that states should be loosing out on sales tax revenue from consumers purchasing online from out-of-state companies, why should it be any less unfair for local municipalities to barred from collecting sales taxes just so the states can collect more?

Of course, including local jurisdictions would be a nightmare of compliance. Online sellers would be required to have a database of every sales tax jurisdiction, and all of the addresses that fall into it. I have previously mentioned how I am saving on utilities by being 100 feet from the city line. My in-laws are roughly the same distance from the line on the other side. Yet the city, state, and zip code of our addresses are identical. Nothing short of a database with millions of entries would work. And then retailers would have to worry about city lines expanding!

Taxing buyer’s location is backwards

Think for a moment how sales tax works in the world of off-line commerce. You travel to a store and make a purchase. The location of the store determines the sales tax rate. In NJ, it is 6%, but in Colorado it is 2.9%. If you walk into a store in Delaware, New Hampshire, Montana, Oregon, or Alaska, you won’t pay any sales tax.

The Wal-Mart nearest to me is inside the city limits of Fort Collins and charges Colorado state, Larimer County and Fort Collins city sales taxes. The one closest to where I work is just outside the city limits. So it only collects state and county sales taxes. By shopping at that Wal-Mart instead, I save 3.85%

What all this shows is that by picking where you shop, you have some control over the amount your are taxed. Because the seller’s location is used to determine the sales tax rate, not the buyers.

The Marketplace Fairness Act would flip that model for internet sales tax. Instead, the buyer’s location is taxed instead of the seller’s. This could lead to foreign companies having to collect sales taxes on sales within the United States, creating additional barriers to international commerce.

Where do you stand on the internet sales tax bill? Do you think the issues I brought up are serious problems or unimportant?

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