If the US Senate had intentions of replacing the federal income tax with the Marketplace Fairness Act, it could have been the basis for a workable national sales tax. But in true government fashion, along the lines of Obamacare legislative fashion, the act is just another government monstrosity which would require online retailers to collect state sales taxes on transactions in other states. The way in which it is written could create some real problems, especially for small entrepreneurs.
Nightmare for Small Entrepreneurs
The problem with this law is that it would require online retailers to collect 45 different sales taxes. There are 45 states with a sales tax, but the tax is different in each state. Some states (like Texas), tax virtually everything, while others (like Colorado), grant all manner of exemptions. In Colorado, construction materials are tax exempt, so somebody who ordered a bag of nails from an online retailer might not pay the tax, but somebody in Texas might.
To make matters more complicated, some states have special features, including tax holidays, in which certain items are cheaper. Many states have tax holidays for school supplies right before the school year. How is somebody who ships only one or two orders a month to that state supposed to deal with that?
Get the picture—this is going to be a nightmare for small online retailers. They’re going to have to learn the sales tax codes for each of the 45 states that have a sales tax. That won’t be much of a problem for big retailers like Amazon.com and Target (which supported the law), but what about somebody selling a few items like used books? It would be cost prohibitive for a company that has one customer in Texas to learn that state’s tax code.
Then there’s the problem of enforcement; it isn’t clear how this law would be enforced. Would state governments hire collection agencies or attorneys in other states to go after small retailers that didn’t collect the tax? Could they garnish bank accounts or take other collection actions?
Would companies like UPS be forced to collect the tax when they made deliveries? What would happen if such companies stopped making deliveries for small retailers to avoid the hassle of dealing with the tax? It could kill online entrepreneurship and some businesses.
Freelancers Could Be Effected
Even freelance writers like me could be affected because I sell a service through websites like Elance. In some states, such as Texas, business services such as writing are subject to sales tax. What happens to all the writers and software developers that use such services? Many of them, I’m sure, will simply go off the grid and go back to communicating through email and taking payments through PayPal.
Would the government require services like Elance and PayPal and banks to report such payments to state tax authorities? Will self-employed professionals such as freelance writers have to start hiring tax attorneys and other experts to protect themselves from state tax authorities?
This nightmare could affect a lot of Americans and deprive some of us of our ability to make a living. Fortunately, it will probably not become law, but the fact that it could pass the Senate is frightening enough.
Good News and Bad News
It’s obvious that the Democrats in the Senate who thought this tax up know little or nothing about business. Nor did they give this poorly written law much thought. If they had, they would not have voted for it.
Another possibility is that the Democrats don’t expect this measure to become law. Even though White House spokesmen say President Obama supports it, there’s little or no chance this will pass the House of Representatives. The Republicans are against it and so, I imagine, are many Democrats. A lot of Democrats, especially those from blue states with lots of online workers, will probably change their minds when they hear the public outcry over this.
The Democrats might have passed this terrible law as a favor to big retailers and other special interests. Tax lawyers in particular would love this monstrosity because it would generate a lot of business for them. Tax attorneys are a major Democrat constituency as are tax preparation businesses such as H&R Block and Liberty Tax.
Also benefiting would be big retailers that would be in a better position to compete with online retailers, particularly discounters. After all, big box retailers like Walmart and Target have no choice but to pay the state sales tax. A lot of online retailers simply ignore state taxes in order to keep costs low.
Most likely this terrible law will die a slow and obscure death in some House committee (we hope). The problem is that this abomination could be back if Democrats win control of the House in 2014. It might also crop up again in some modified form, such as a higher tax on online alcohol sales to get the vote of cultural conservatives.
What the Marketplace Fairness Act Tells Us about Tax Policy
The Marketplace Fairness Act tells us one thing about U.S. tax policy; it is written by big business for big business. Small business was completely ignored in the writing of this law, even though it is the creator of most of the new jobs and new wealth in the United States.
The senators only listen to large corporations represented by expensive lobbyists and try to give everybody else the shaft whenever they can. Tax policy is no longer about raising revenue in the United States; it is about rewarding special interests for their political support. That’s why the income tax stays around because it allows Congress to reward large corporations and other big donors with tax breaks and loopholes in the tax code.
Tax Industry Eyeing the Internet
This law also shows us that the tax industry in and out of government is eyeing all the revenue being generated by online businesses. The tax industry, which includes state and federal tax bureaucracies, tax industries, and tax preparers, sees all the small online enterprises as an opportunity. The best way to harness that opportunity is with some sort of online sales tax, or more precisely, a complex, unfair set of taxes like those the misnamed Marketplace Fairness Act would set up.
The idea here is to create something like the present Internal Revenue Code, which is convoluted and impossible for average people to understand. That creates jobs for tax professionals—retired bureaucrats who charge citizens a fee to solve problems created by other bureaucrats.
The Marketplace Fairness Act is only the opening salvo in the tax industry’s war on the Internet. If this law fails, the tax industry will keep trying until it gets some sort of Internet tax in place to increase its business. The Democratic Party (which represents the tax industry) will do its best to make such a law a reality.
Internet Sales Tax Not a Bad Idea
The strangest aspect of this scenario is that an Internet sales tax is not a bad idea if it were done right. This won’t happen, because such a tax is a national sales tax, and that’s the last thing the Democrats and their paymasters in the tax industry want to see. A national sales tax would abolish the progressive federal income tax system we have today, which would put the tax industry out of business. There’s no way the Democrats are going to let that cash cow expire without a brutal fight.
If the federal government simply charged a basic levy on online sales, the system would be fair. Small businesses would have just one tax to deal with, and they would know what they had to pay. There would be no forms or tax nightmares for individuals to deal with each April. A percentage of the revenues collected could be kicked back to the states. The fairest way to do that would be to use a formula based on population. This wouldn’t be perfect, but it’d be far better than what we have in place at the moment.
The lesson here is: Don’t expect real tax reform in Washington. The Democrats want to make taxes more complex in order to reward some of their favorite special interests. You, the taxpayer, really don’t factor into the equation whatsever.