State governments facing fiscal challenges are looking for an easy way out.  Governor Robert Bentley (R-AL) and other Alabama lawmakers are pushing the Marketplace Fairness Act (MFA) as a quick fix.  Alabama can start filling its coffers if it can force out-of-state businesses to collect and remit Alabama’s sales tax. 

But what Alabama lawmakers don’t understand is that the MFA Internet sales tax will actually hurt Alabama’s web-based businesses. With e-commerce accounting for over $5 trillion dollars in nationwide sales each year, and 90% of sales taxes already collected, the Internet marketplaces shouldn’t be tampered with.

Current Alabama law states that when a resident makes an online purchase out-of-state, they must file a tax return by the next month and pay the Alabama use tax.  But because the use tax is self-reported and complicated, most people don’t bother reporting their purchase.  In fact, most people don’t even know they are required to report their out-of-state online purchases.

Underreporting of online purchases has led lawmakers to back the MFA, which requires out-of-state businesses to collect the use tax on Alabama’s behalf.  It’s seen as a solution to revenue shortages. The MFA would require Alabama’s online businesses to collect and submit sales taxes for every tax jurisdiction that they ship goods to.  Likewise, other states’ online businesses would be required to collect and remit Alabama’s sales tax, which is unlikely to bolster Alabama’s revenues. Ninety prevent of sales taxes are already remitted by the major businesses, and states are expected to pay for the small business software to collect.  Therefore it is likely this new collection mechanism will cost more than it brings in.

Worse still, the MFA would allow states to exercise the unprecedented power to tax outside of their state boundaries.  It could bolster state revenue, but it doesn’t come without costs—costs that severely outweigh the possible revenue.  Online businesses will be burdened with collecting and remitting taxes for every tax jurisdiction they do business with (which could be over 9,000!). The compliance costs alone could put small companies out of business. 

Online retailers would then be subject to audits from all tax jurisdictions they ship goods to, which creates a serious representation problem.  Company owners, employees and shoppers will be regulated by other states without any political recourse

And that’s not the only way shoppers lose under the MFA.  Under Pennsylvania’s online sales tax, customers have been charged tax when none was owed.  Further complicating online sales taxes with the MFA will just exacerbate the confusion and costs of sales tax compliance and expose online shoppers to tax errors.   

Forcing online businesses, a crucial part of our economy, to undertake excessive compliance costs that could force them out of business is not a real solution.  Big, online retailers with teams of corporate lawyers may be able to survive the MFA storm, but small business will undoubtedly suffer. 

The MFA would open a huge can of worms for Alabama; it’s a misguided policy aimed at nothing more than bolstering Alabama’s bank account at the expense of small business.  If Alabama wants to bolster revenue, it needs to keep the tax system fair, competitive and simple to encourage innovation and growth—not encroach on state sovereignty and put online retailers out of business.