Today the Senate Commerce Committee is holding a hearing to push for an Internet sales tax. This follows a similar effort by the House Judiciary Committee late last month. And while the Wall Street Journal ran a cover story recently claiming (somewhat misleadingly) that GOP governors are throwing in the low-tax towel and signing off on online sales taxes, Sen. Jim DeMint (R-S.C.) has an op-ed in the same pages today telling fiscal conservatives why they should do the opposite. So, what’s all this Internet tax talk about?

The Senate’s Marketplace Fairness Act and House’s Marketplace Equity Act – currently the leading contenders amongst federal online tax bills – would raise state-level taxes on Internet and out-of-state purchases while upending critical taxpayer protections built into the tax code to protect Americans from the tax laws of other states. From a taxpayer perspective, any bill that touches Internet sales taxes must preserve the physical presence standard and protect consumers from a higher tax burden. Unfortunately for taxpayers, the federal online sales tax bills miss the mark widely on both fronts.

Under the U.S. Supreme Court’s ruling in Quill v. North Dakota, it is a violation of the Commerce Clause for a state to require an online or remote retailer without a physical presence in that state to collect and remit the sales tax. The Senate’s Marketplace Fairness Act, sponsored by Sens. Dick Durbin (D-Ill.) and Mike Enzi (R-Wyo.), would permit overzealous state tax collectors to reach well outside their borders and force online and other out-of-state retailers to collect their state’s sales tax.

Today, ATR submitted written testimony against the Senate bill. Here’s the long and short of it for taxpayers:

State-level Tax Burden Will Increase: In support of his bill, Sen. Enzi stated recently that “the Marketplace Fairness Act is not about new taxes.” The legislation even included a purely rhetorical section called “No New Taxes.” Yet, proponents are also quick to point out that it could raise as much as $23 billion in tax revenue from consumers at the state level. And while consumers do owe “use tax” on products they purchase online and out-of-state, this measure shifts the tax collection burden to out-of-state retailers, which is certainly a new form of taxation. At the least, businesses that do not pass sales tax liability onto consumers at the register will see new out-of-state sales taxes come out of their bottom line.

Dissolving Physical Nexus Weakens a Fundamental Taxpayer Protection: The physical nexus standard is a staple of our tax code, preventing states from reaching across their borders to force out-of-state businesses and individuals from complying with their tax codes. The Marketplace Fairness Act will dissolve the physical nexus requirement for collecting sales taxes.

To put it simply, measures to dissolve the physical presence standard have the potential to usher in the second coming of taxation without representation in America.

Outsources State Tax Rules to an Unelected Body: Under the Marketplace Fairness Act, twenty-four states operating under the Streamlined Sales and Use Tax Agreement (SSUTA) would be able to tax remote sales almost automatically. Remaining states would have to comply with a number of requirements or choose to join the Streamlined Sales Tax Project (SSTP).

Reliance on SSUTA allows a handful of tax administrators and state lawmakers on the Streamlined Sales Tax Governing Board – which has long advocated for tearing down the physical nexus standard for sales taxes – to control remote sales tax decisions for states and incents the states that are not part of SSUTA to join. Non-SSUTA states will watch helplessly as the “streamline states” hassle their resident businesses to collect more tax revenue.

Increases Tax Code Complexity: The bill will force online, catalogue, TV and other retailers to comply with over 9,600 sales tax jurisdictions across the country, while brick-and-mortar stores must comply with only the one where they are located.

Here’s the bottom: The effects on taxpayers of the Marketplace Fairness Act and similar legislation would be dramatic. From a taxpayer perspective, any bill that touches remote sales taxes must preserve the physical presence standard and protect consumers from a higher net tax burden. Unfortunately, the federal online sales tax bills miss the mark widely on both fronts.

For a more indepth look, check out ATR's written testimony.