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 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.

Threatens Privacy

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.

Slippery Slope

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.

Too Confusing

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.