Marketplace Fairness Act "Free" Software is like a Free Puppy
A one size fits all free software hardly has a chance of working seamlessly with all of the different web-based platforms. Integration costs will put small businesses out of buisness.
The Marketplace Fairness Act offers online businesses “free” software to help them comply with 9,600 different tax codes.
However, as Scrapbook.com co-owner McKane Davis explains, the high integration costs that come with it will wipe out a small businesses narrow profit margins.
Click the image below to listen to Davis' explanation of the problems with "free" software:
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Small Businesses Identify Serious Problems with Internet Sales Tax Legislation
Small online businesses launched a major effort today to combat misleading claims from those in favor of the Marketplace Fairness Act. The eMainStreet Alliance announced that they are collecting signatures for their letter to the House Judiciary Committee opposing MFA.
These small online business believe that true Main Street physical retailers and true Main Street Internet retailers are not at odds, but, in fact, allies. eMainStreet makes the point that “in 2012, big-box retailers accounted for more than 83 percent of online sales. Their online market-share is increasing, and by way of the MFA the growth of their retail oligopoly will accelerate.” This is precisely what happened in the physical retail space.
Here are some paraphrased take-always from the eMainStreet letter:
- Audit risks for small online retailers will increase by 4,500%. Not only are there 45 new state audit authorities, but they also comprise a relatively small pool of targets for this type of audit, so proportionally their likelihood of being audited multiple times increases.
- As online businesses grow they will expand and create nexus in other states, begin to use state services, and voluntarily collect sales tax in those states, while benefitting from actual representation and due process.
- “Showrooming” where a customer will visit a store to test a product works both ways – it affects online and physical retailers. A January 2013 report from PwC shows that only 2% of the 10,000 consumers surveyed research products in-store and then shop online. However, 23% did the opposite and went online to research before buying in-store.
- There is a significant compliance-driven financial burden associated with “free software.” In the first year of the law, the integration, compliance and remittance costs for business ranges from $20,000 to $300,000. Many eMainStreet members above the $1M threshold estimate that compliance costs will exceed their entire profits for the year. Forcing layoffs and, in some instances, business closures.
- Marketplace Fairness could cost approximately 220,000 jobs.
States Bank on Online Sales Taxes to Increase Revenue, Not Cut Taxes
The Wall Street Journal article “States Bank on Online Sales Tax” from May 20th is a bit misleading. Amy Schatz reports that “Maryland and Virginia both passed transportation bills that counted on the revenue to avoid implementing future state gas-tax increases, which would kick in if Congress turns down the Internet-sales tax bill.” This makes it sound like Virginia and Maryland were trying to save their taxpayers some money by shifting revenue sources, however; this is not the case.
Virginia’s full transportation plan is a net increase of $5.9 billion over five years, and Maryland’s plan is a net increase of $4.4 billion over five years.
Virginia may have erased the 17.5-cent tax on gasoline, but they raised the general sales tax from 5% to 5.3% on all retail sales and applied this rate to gasoline. However, if you live in Northern Virginia or Hampton Roads you’ll be paying and extra .7% in sales tax on local and remote sales for a total of 6%.
Interesting that this is the plan, since the 214 page Streamlined Sales and Use Tax Agreement (SSUTA) calls for tax simplification and many have been arguing that there won’t be complexity in that tax code. Some, outside of SSTUA, have even implied that the goal is one flat sales tax for each state. Clearly that is not what Virginia legislators think.
Since states don’t want to simplify their tax codes, the Streamlined Sales Tax Governing Board has downgraded from uniform sales tax and use requirements to common practices, especially in terms of sales price and credits for taxes paid elsewhere. Each SSTUA member state can have its own definitions of taxable items and terms like "Sales Price".
Here is the Amendment that was accepted:
Section 328: TAXABILITY MATRIX
Original: (1) To ensure uniform application of terms defined in the Library of Definitions each member state shall complete a taxability matrix adopted by the governing board.
Amended: (1) Library of Definitions: To ensure uniform application of terms defined in the Library of Definitions adopted by the governing board pursuant to Section 327 each member state shall complete, to the best of its ability, Section 1 of the taxability matrix.
(2) Common Practices: To inform the general public of its practices regarding certain products, service, procedures, or transactions, adopted by the governing board pursuant to Section 335 each member state shall complete, to the best of its ability, Section 2 of the taxability matrix.
Some other interesting points to compare are the fiscal note linked to the final version of the transportation tax hike signed into law, with McDonnell’s revenue numbers attached to the original tax hike plan. Somewhere along the way, the revenue gained from implementation of the Marketplace Fairness Act decreased when the percentage of tax collected increased. The initial numbers included a collection total of $175.7 million from remote sales tax collection, which only accounts for beginning collection, not the .3% sales tax increase. However, the fiscal note, which does include the .3% sales tax increase seems to claim that remote sales tax collection will bring in $145.9 million. Someone somewhere is fudging numbers.
Speaking to other points in the WSJ piece, it is worth noting that from the initial Senate vote to final passage: nine senators decided to oppose rather than support, more Republicans voted against the MFA than in favor, and all 7 republican senators age 55 and under voted against the bill.
Its nice that states want to cut the income tax, but those cuts should be revenue neutral. As was shown above, states are using fuzzy numbers to talk about how much they could collect from remote sales. For some perspective, the cumulative total of all state general funds is $668 billion; $23 billion is less than 3.5% of general fund revenues. Plus, in 2012, big-box retailers accounted for more than 83% of online sales and therefore collected sales tax due to physical presence requirements. There isn’t that much “new revenue” to go around.
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Weaponized Audits: If the Fed Does It, Why Wouldn't the States?
In light of recent revelations about the IRS’s shady practices – disregarding Fourth Amendment rights online and targeting groups for their political affiliation – Americans should consider three important questions:
1. Do we really want to grant nearly every state access to our tax records with the IRS?
2. Do we really want to expand state tax collection authority beyond each state’s borders?
3. Do we really want state revenue departments with authority as limitless as the Internet?
It is nonsensical to reward the abuse of government power by expanding it. The obviously answer to each of these questions is absolutely not!
States’ physical borders are recognized as the end of state legal authority in tax collection and other matters. We know from experience that when states have the ability to reach across their borders and tax competitors or target out of state entities with penalties, they will. There’s a reason the Articles of Confederation was an absolute failure. Giving both states and the federal government absolute expansive power is a horrible idea.
Shays Rebellion August 1786-June 1787
On the senate floor, Senator Enzi said that audits on businesses rarely happen, but they do happen, and an expansion of state tax authority across borders allows even more opportunities for businesses to be on the receiving end of a misguided audit.
These are not irrational worries that state IRS' may abuse their power in states searching for revenue. The action of the Federal Internal Revenue service, targeting groups with a certain affiliation is proof positive that these instances ar enot only possible, but they happen int the worst way. IT is not a far cry to believe that without the proper safe guards, some states will aggressively pursue businesses and tax revenue from other states.
Just wait for the first time a California department of revenue takes a Mississippi business to court over a sales tax dispute. Opening the door for even one abuse of power is too much, one time too many.
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IRS Actions Prove Now is the Time for Electronic Communications Privacy Reform
The IRS seems to know no bounds – they think they can read your email and now they target non-profits based on party affiliation.
Senator Mitch McConnell sent numerous inquiries to the IRS about its practices during the election season:
“… the IRS is requesting the names of donors and contributors to organizations that apply for tax exempt status. In doing so, the IRS appears to be circumventing the statutory privacy protections that Congress has long provided donors.”
In the IRS announcement today, Sen. McConnell now has his response. His requests were not unfounded. The IRS was abusing its authority, and McConnell plans to get answers.
“Now more than ever we need to send a clear message to the Obama Administration that the First Amendment is non-negotiable, and that apologies after an election year are not an sufficient response to what we now know took place at the IRS. This kind of political thuggery has absolutely no place in our politics.”
The House will also be investigating the IRS’ practices. House Oversight and Government Reform Chairman Darrell Issa tweeted today “@GOPoversight will aggressively follow up on the #IRS IG report & hold responsible officials accountable for this political retaliation.”
A major reason for having an independent judiciary is to protect against political abuses from the executive branch. These over reaches into American citizens privacy need an aggressive response. Moving the Electronic Communications Privacy Reform delineated in the Leahy-Lee bill, S. 607, is a crucial step in providing citizens with a way to protect themselves from government overreaches into their private lives.
Some have suggested that federal agencies pursuing civil investigations should be able to go to a third party with a subpoena rather than their target, because they don’t have the ability to get warrants. Clearly these agencies, the IRS, OSHA, FCC, EPA, need stronger guidelines as to what they can and cannot do.
As of now S. 607 says that an IRS agent, an EPA investigator, OSHA or any other of the 300 federal agencies with subpoena power cannot get access to private information or proprietary records on their own say so. They can subpoena their target, but they cannot go to the third party without the targets knowledge.
ECPA reform has been moving steadily in the Senate and has picked up steam in the house as a result of IRS actions – Rep. Yoder and Graves released a house version of the Leahy-Lee bill on the same day as Rep. Salmon, and the Lofgren-Poe bill covers warrants for GPS location information in addition to warrant for electronically stored content.
The IRS is clearly out of control. Legislators must move quickly to curb these abuses and pass the ECPA without exceptions for agencies pursuing civil investigations.
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Marketplace Fairness Act: Taxing Questions Remain Unanswered
Dear Senator Enzi & Senator Alexander,
Thank you for your reply to our letter dated May 3, 2013 regarding the Marketplace Fairness Act. We appreciate you taking the time to answer; however, we do not think the most glaring issues have been addressed:
We have strong concerns about the preemption in section 6, which is the cause of a number of our questions (Questions 1, 3, 5, and 8).
Section 6 states: “this Act shall not be construed to preempt or limit any power exercised or to be exercised by a State or local jurisdiction under the law of such State or local jurisdiction or under any other Federal law.”
Under Section 6 preemption, states can choose not to subscribe to the SSUTA or the MFA minimum simplification requirements, create their own nexus laws, and collect taxes on out-of-state sales that way. These laws, which dubiously create nexus standards, would be outside of the minimum simplification requirements and also not require that a state subscribe to the $1 million small-seller threshold. Meaning that states could tax all remote sales regardless of the businesses revenue or gross receipts.
By stating that the federal MFA does not preempt or limit any power exercised or to be exercised by a state, states are now free to pursue out-of-state tax collection through their own means. For example, the New York affiliate marketers law; the Michigan, Arizona, or California privilege tax; California economic nexus; or the Oklahoma and Kentucky reporting requirements.
In its Quill decision, the Supreme Court acknowledged that Congress had the power to act on the issue of remote-seller tax collection. The MFA, as written, would allow states the ability to pass constitutionally questionable laws that attempt to expand nexus. The Supreme Court has never addressed the affiliate aspect of the New York law. The Supreme Court may have addressed the effect of “affiliates,” companies with partially shared ownership, on creating a physical presence nexus, but it has never addressed the effect of “affiliates” as term for online advertisers as used in the New York state law to create a physical presence nexus.
The MFA explicitly ignores this issue by allowing state laws to preempt the MFA. The fact that there are conflicting state court opinions on the effect of affiliate marketers creating a physical presence nexus – New York courts say they do, while Illinois courts say they don’t – is a reason that Congress should have the MFA preempt state law on the subject. Otherwise, remote retailers will continue to operate under a patchwork of conflicting state, and would be federal, law.
While these laws may be constitutionally questionable, a small-seller who does not have any physical presence in the state will most likely not have the resources to bring their claims to court.
The Section 6 preemption language was not included in the bill until this Congress. It is dangerous language that allows states to define nexus as they see fit and impose their taxation laws across their own physical borders. Removing this language would be helpful.
We are still concerned with the procedure for audits, dispute resolution, and collection authority.
Sales tax is passed on to the customer by the business; however, the business is the entity responsible for remitting the tax and therefore the entity beholden to tax collectors and taxation. A business owner being taxed by and out-of-state revenue department is subject to taxation without representation. Under the single audit authority, businesses would still be left open to audit possibilities from around 45 different tax jurisdictions, and it is not clear that tribal lands would be part of the single state auditing entity.
In your answer to the question about international taxation, you say that states can impose audits and liens on foreign businesses, by extension this authority would apply to businesses in other states as well.
We are also fearful that the limits on state audit ability and personal liability are not strong enough. There must be some way to prevent businesses from having to deal directly with out-of-state tax collection audits. Even if audits happen rarely, the possibility still exists. Language expressly protecting business from this sort of court proceeding would be very helpful in addressing our concerns
While there is a 90-day waiting period for states to begin collecting remotes sales tax, we believe that the Section 6 preemption, means that states can retroactively enforce their tax collection laws on their own citizens, regardless of the MFA’s prospective nature and waiting periods. Again, removing the Section 6 language would also be helpful to put in the bill, in addition to a removal of use tax collection should a state decide to participate in the MFA structure.
Our concerns about participation and simplification standards.
If a state chooses not to participate, that means they choose not to participate in collecting tax from other states, but there is not way for a state to choose not to comply with out-of-state sales taxes. Allowing states, especially those that have chosen not to enact a sales tax, to choose not to participate by simultaneously denying collection and remittance would offer states the greatest amount of choice and recognition of federalism under this crafting of remote sales tax collection.
To truly address federalism we must look at remote sales tax collection from both angles: not just the majority of states collecting sales tax, but also from the position of a minority of states who have elected against a sales tax.
Even if the Section 6 preemption is removed, we still find the simplification standards problematic. While software is often cited as the way to solve many simplification problems, the MFA allows states to continue with dubious rounding rules that will certainly apply to digital goods, allows taxation on daily deals at the full voucher value not the paid value, and does not require that remote sellers get the same tax holidays or deals that in-state sellers receive. These special deals are provided to all physically present sellers including big box stores
Including tribal lands adds around 550 new tax jurisdictions that can audit out-of-state retailers. These tribal lands were not included as taxation jurisdictions in S.336 of 2013, or S.1832 of 2011.
Even though the software is offered free of charge, sellers could end up with more than 45 different software products to integrate into their systems. When adding new software to a system, licenses are a fraction of the cost. Businesses must also pay for integration, mapping within the business’ existing system and any additional hardware that may be necessary.
Our concerns about taxation of financial services and digital products.
When looking at financial services products, we have to say that no state imposes taxes on financial services yet. Many at the federal level have looked to taxing financial services and in the European Union they already have financial transaction taxes. There is nothing in the MFA that prevents states from extending its authority to tax stock trades made online. There is no distinction between products and services, and there is no exemption for sales tax on specific products.
Additionally without clarification and inclusion of the Digital Goods and Services Tax Fairness Act of 2011 (S.971) in the bill language that the MFA does not apply to digital goods, the MFA could be construed as proscribing the manner in which digital goods are taxed.
In summary, the preemption language is most problematic. It allows states to neglect the simplification requirements and pursue cross-border taxation in a way that is not simple, easy, or fair. Even though Congress has the authority to legislate in matter of remote taxation, the preemption language will likely make remote sales tax collection overly burdensome to interstate commerce and therefore unconstitutional. In addition to removing the preemption language, Congress should include Representative Goodlatte’s Business Activity Tax Simplification legislation and Representative Lofgren’s Digital Goods and Services Tax Fairness legislation to prevent state taxation overreaches in the digital sector and on business income.
Thank you again for your previous reply and concerns. Our questions and this reply are intended to flesh-out issues and present reasonable solutions to what are major issues for taxpayers. We look forward to working with you to address these issues and ensure no legislation is passed that harms taxpayers nationwide. Please have your staff contact Katie McAuliffe by email, firstname.lastname@example.org, or phone, 202-785-0266, if you would like to continue the discussion.
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Norquist Letter to Senator Enzi Regarding Marketplace Fairness Act Tax Problems
Today, Americans for Tax Reform president Grover Norquist sent Senator Mike Enzi of Wyoming a letter detailing 16 questions that should be resolved in order to protect taxpayers from state tax collection abuses.
"We believe there are a number of unanswered questions concerning the Marketplace Fairness Act that remain troubling to taxpayers," Norquist said.
• What measures protect businesses from tax audits, court proceedings and penalties like tax liens imposed on a business by state departments of revenue where the business has no physical presence? How will businessmen and women be protected over time from politicians in a different state that they cannot vote for or against? Is there a danger of establishing taxation without representation?
• Can states audit remote sellers for customer data and then retroactively (i.e., prior to the enactment) audit citizens for “unpaid” Use Taxes? Some states, such as California, can perform audits reaching back six years. Can states ask remote sellers for historical customer purchasing data and then audit citizens based on this data?
Americans for Tax Reform believes that it is important for taxpayers nationwide that these questions are addressed before an acting a new law that could have many unintended consequences in the name of fairness.
May 2nd, 2013
Dear Senator Enzi,
We believe that there are a number of unanswered questions concerning the Marketplace Fairness Act that remain troubling to taxpayers. We would appreciate your leadership in answering the following questions regarding the legislation as it stands and the recent manager’s amendment that you filed to S. 743, the Marketplace Fairness Act.
1) What measures protect businesses from tax audits, court proceedings and penalties like tax liens imposed on a business by state departments of revenue where the business has no physical presence? How will businessmen and women be protected over time from politicians in a different state that they cannot vote for or against? Is there a danger of establishing taxation without representation?
2) Does the bill prevent double taxation by removing the Use Tax? If states still have a Use Tax law on the books what provisions of MFA prevent states from charging Use Tax in addition to sales tax?
3) Can states audit remote sellers for customer data and then retroactively (i.e., prior to the enactment) audit citizens for “unpaid” Use Taxes? Some states, such as California, can perform audits reaching back six years. Can states ask remote sellers for historical customer purchasing data and then audit citizens based on this data?
4) While the legislation says that it does not break physical nexus requirements for other types of taxation, some states have “privilege” taxes already in law. Some of these privilege taxes require enaction of MFA as written to enforce “privilege” tax collections. For example Michigan law states:
“there shall be collected from all persons engaged in the business of making sales at retail, by which ownership of tangible personal property is transferred for consideration, an annual tax for the privilege of engaging in that business equal to 6% of the gross proceeds of the business, plus the penalty and interest if applicable …”
Is there anything in MFA that prevents this type of application of MFA collection standards?
5) If states do not conform with MFA requirements or basic simplification requirements, does Section 6 of the MFA permit them to continue to expand “nexus definition” laws? Can California collect tax based on economic nexus laws? Can New York collect based on affiliate nexus laws? Could Oklahoma expand its reporting requirement laws across its borders?
6) Why are tribal lands now included as “states” in the manager’s amendment? Why were tribal lands not included in the original bill? Have any of the tribes agreed to the same rules the states have, or asked to be included?
7) During the floor debate, there were many questions on how the MFA would apply to sellers based in other countries. What is the enforcement process for overseas sellers with no presence in the United States? Are they required to comply with state tax collection duties? Under MFA, do states have the ability to bring enforcement actions against overseas businesses that are selling remotely into the state?
8) Does the MFA protect the small sellers, who would be eligible for the small seller exemption, from states that exercise their Section 6 discretion to expand their tax collection authority through nexus definitions?
9) While the minimum simplification requirements preclude the Streamlined Sales Tax Agreement (SSUTA), if states make changes to the SSUTA after the enaction of MFA do those changes become law?
10) Included in the manager’s amendment is language that clarifies that a state may not impose requirements on remote sellers that they do not impose on non-remote sellers. Currently, many states give special state sales tax deals for businesses with in-state presence, while offering remote sellers no such deal. Since this practice is giving preferential treatment to in-state sellers in relation to the collection and remittance of sales taxes, will this be prohibited under MFA. Will there be any limitation on states giving special sales tax breaks to large in-state businesses while forcing strictly out-of-state businesses with no presence to comply?
11) Under SSUTA states agreed that sales price was the cost that a consumer actually paid for an item. However, Nebraska wants to claim that “sales price” is the gross price before discounts and coupons, thereby charging the business tax on retail value rather than amount paid (Think discounts from Groupon or Living Social. If the retail cost is $75, but the discount makes it $25, Nebraska would want to collect sales tax on the $75 rather than the amount actually paid, which was $25). Is there anything in the MFA that prevents this type of excessive taxation from occurring in Nebraska or other states? From what we understand the minimum requirements of MFA do not prevent this type of theoretical taxing from occurring.
12) How could MFA requirements affect the financial services sector? Will financial products that are sold over the Internet, like portfolio management services, credit reporting service apps, or insurance service fall under MFA taxation authority?
13) Home-schooling parents meet at state, regional, and national gatherings in part to sell used textbooks and related products that their children have completed. If these transactions are conducted online through an aggregation site, would the transactions be subject to the MFA small-seller exemption in states that exercise their Section 6 discretion to expand their tax collection authority through nexus definitions?
14) How will the MFA affect digital goods and services? Without a clear structure for digital goods taxation, these types of goods could fall under multiple taxation schemes. Does the
MFA protect digital goods from multiple taxation?
15) In terms of digital goods, like apps and music, who is responsible for remitting the sales tax: the vendor, an app store or sales platform, or the creator of the digital good?
16) Some states, like Maryland have different sales tax rules for goods that are priced under one dollar. For example:
Effective January 3, 2008, the Maryland sales and use tax rate is 6 percent, as follows:
• 1 cent on each sale where the taxable price is 20 cents.
• 2 cents if the taxable price is at least 21 cents but less than 34 cents.
• 3 cents if the taxable price is at least 34 cents but less than 51 cents.
• 4 cents if the taxable price is at least 51 cents but less that 67 cents.
• 5 cents if the taxable price is at least 67 cents but less than 84 cents.
• 6 cents if the taxable price is at least 84 cents.
On each sale where the taxable price exceeds $1.00, the tax is 6 cents on each exact
• 1 cent if the excess over an exact dollar is at least 1 cent but less than 17 cents.
• 2 cents if the excess over an exact dollar is at least 17 cents but less than 34 cents.
• 3 cents if the excess over an exact dollar is at least 34 cents but less than 51 cents.
• 4 cents if the excess over an exact dollar is at least 51 cents but less than 67 cents.
• 5 cents if the excess over an exact dollar is at least 67 cents but less than 84 cents.
• 6 cents if the excess over an exact dollar is at least 84 cents.
If Maryland, or states wishing to follow suit, do not comply with SSTP or the minimum simplification requirements included in MFA, can they tax low-cost goods in this way? This applies in particular to digital goods like apps and songs. Does the MFA require simple, flat taxes for low cost and digital goods?
Thank you in advance for your consideration and response to our concerns. I look forward to working with you to address these issues and ensure no legislation is passed that harms taxpayers nationwide. If you have any questions or concerns while responding to this letter, please have your staff contact Katie McAuliffe by email, email@example.com, or phone, 202-785-0266.
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Marketplace Fairness Act, Exposing Your Business to Every State's IRS
This post originally appeared on March 11, 2013
The Senate Budget Committee will hold a budget resolution markup in the coming week. One might suspect that the Main Street Fairness Act sponsors will make play to include an internet sales tax messaging amendment to the Senate Budget Resolution, as budget resolutions can sometimes become a free-for-all.
However, proponents of the Marketplace Fairness Act could wait until the floor debate to introduce an amendment because its likely they could round up 50 floor votes, which is the threshold for amendments to the budget resolution.
This is unfortunate because it’s just a bad bill. Businesses in Virginia would become tax collectors for other states, and if there were any disputes at the end of the year those businesses would be subject to out of state revenue departments and courts.
A coalition of free market thinkers released a letter today opposing the Marketplace Fairness Act. Read it here.
To voice your opposition to Marketplace fairness, visit www.taxeswithoutborders.org to contact your congressman and senators.
If you need some more convincing, below are some of the strongest arguments rehashed as to why this is a bad idea.
Flaws in the Internet Sales Tax Mandate
How it works
At the end of each year businesses are responsible for sales tax. They can choose to tax their customers at the point of sale or pay out what they owe in sales tax at the end of the year. Businesses therefore act as a tax collection arm for the state in which they do business. The Internet sales tax mandate would force businesses to become sales tax collectors for all states. For example, if a customer in New York State makes a purchase from a company based in Virginia, the Virginia business would have to collect New York sales tax from the customer and then send the collected tax back to New York. At the end of the year if there are any disputes over sales tax collection the Virginia business would be subject to the New York Department of Revenue and New York Courts.
In order to collect the proposed internet sales tax, businesses would be forced to send personal information about their customers to a host of state revenue departments. This opens consumers up to the very real potential of losing personal information. In South Carolina, for example, hackers gained access to tax return data inlcuding approximately 3.8 million Social Security numbers, 387,000 credit and debit card numbers and 657,000 business tax filings filed with the SC Department of Revenue. Hackers have consistently proven they possess the capabilities to overcome many security measures. Government agencies lack the expertise and resources to properly protect the personal information they already gather. A law that mandates they collect more information only opens more individuals and businesses to the dangers associated with the loss of personal data.
To some people, passing a federal law authorizing states to collect internet sales tax across their borders may seem like a small change. However, eliminating the need for businesses to have a physical presence in a state in order to be taxed encourages states to tax non-residents who have no recourse to fight against said taxes. Additionally, this change would provide a precedent for lawmakers to authorize a host of new taxes on internet usage, ecommerce, and other services associated with the internet. With a digital goods tax (a tax on digital music, e-cards, video game accessories, etc.) being considered in Congress and the Internet Tax Freedom Act of 1998, which protects taxpayers from taxes on internet access and other ways, expiring in 2014, the passage of an internet sales tax would be a dangerous boost to greedy coalitions pushing for more internet based taxes. Essentially, an internet sales tax is a step towards states increasing taxes on consumers they do not serve and would aid government efforts to profit from areas in which taxpayers are currently protected from taxation.
If Congress were to pass an internet sales tax mandate, a small business, for example an individual who sells large amounts of jewelry on Etsy, would have to comply with a host of different tax codes for every state and municipality they sold to. With over 9,600 of these state and local tax codes, this would be confusing and an onerous burden to place on start-up businesses that have thrived online precisely due to the lack of internet regulations.
In response proponents may point to a small seller exemption of $1 million to alleviate the financial compliance burden. In fact there could be other definitions for what constitutes a small business under an online taxation scheme. The Small Business Administration defines a small business as one, whose Annual receipts do not exceed $5.0 to $21.0 million, depending on the particular product being provided. Additionally some have suggested that number of employees could be used for the exemption standard. However, the mere inclusion of a small seller exemption is an admission that this tax scheme would cause harm to small business.
Some may argue that the Streamlined Sales Tax Agreement would eliminate the burdensome number of tax jurisdictions. However, the legislation as introduced in the 113th Congress, gives states the option to either meet the SSTA standards or other minimum standards as laid out in the bill. If states have not been able to agree on a SSTA in the last ten years, what makes us think that they will now, especially when given the option for meeting far lower standards?
Finally granted that software could solve the burdensome compliance problem, because this is readily available. However, there is not a solution to the dispute resolution problem – Oklahoma businesses subject to revenue departments and court systems in California – which would be overly burdensome for a smaller business doing more than $1 million in remotes sales.
Discourages Tax Competition
An internet sales tax mandate will create competition among states for higher taxes, rather than lower taxes. Currently, states can only tax those consumers who reside within their borders. This “physical presence standard” ensures that the businesses taxed by states have the ability to express their approval or displeasure with state tax code through elections, referendums, etc. Eliminating the physical presence standard means that states will increasingly seek to collect taxes across their borders from businesses with no recourse. Thus states will compete for revenue by increasing cross-border taxes, rather than lowering taxes. In difficult economic times when many cash-strapped states are desperate for revenue, an incentive for them to raise taxes can never be beneficial.
Expands State Tax Authority
States have always taxed those people and businesses within their physical borders because legal and judicial precedents clearly instruct them to do so. The Supreme Court ruled in a case titled Quill v. North Dakota that the Constitution’s Commerce Clause establishes the need for a business to have a physical presence in a state in order for that state to collect sales tax from it. An internet sales tax mandate would overturn this decision, and would also go against the spirit of laws such as the Internet Tax Freedom Act of 1998.
The 1998 law banned taxes on internet access and other means of internet taxes in order to promote economic growth through the free and open internet. The benefits of such policies can be clearly seen in the success of both large internet companies like Amazon and small-selling platforms such as EBay. Expanding state tax authority by passing an internet sales tax mandate making businesses into tax collectors for states where they cannot vote and they may be subject to legal action is unprecedented harmful legislation.
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From My State to Yours: Internet Sales Tax Legislation Equals Cross-border Tax Liens
The Senate has been holding votes on S.743, the Marketplace Fairness Act (MFA). A procedural vote was just held with 75 in favor and 22 opposed. MFA doesn't just mean taxes it means tax enforcement that includes audits, court proceedings, and tax liens.
Tax collectors are poised to expand their tax base to people who cannot vote for them. Under MFA, nothing prevents Illinois from aggressively going after businesses in Louisiana that they believe haven’t paid enough in sales taxes.
MFA says that businesses in all 50 states that sell remotely have to collect and remit sales taxes to the states they sell into. However, nothing prevents Business in Texas from being subject to the New York taxation authority and the New York court system.
States are required to provide online sellers software to comply, but there is no requirement for a national software system in the MFA, so Businesses could feasibly have 45 different software regimes to implement.
States claim they are losing out on $23 billion, in revenue, but that’s a nationwide number and only half comes from online sales. States are arguing over a shared number somewhere between about $8 and $12 billion. The software implementation will certainly cost more than each state’s share of that figure.
For some more perspective, the cumulative total of all state general funds is $668 billion, $8 to $12 billion equals one percent of that figure. States want a massive expansion of tax authority for less than 1% of their budget.
This is a massive expansion of tax authority across state borders for a plan that doesn’t raise enough money to even pay for itself. Its no wonder we’re in budget short falls everywhere.