The WasteWatcher: The Staff Blog of Citizens Against Government Waste

Congress Should Not Bring Back the Marketplace Fairness Act

The WasteWatcher is the staff blog of Citizens Against Government Waste (CAGW) and the Council for Citizens Against Government Waste (CCAGW). For questions, contact blog@cagw.org.


According to the National Retail Federation, holiday sales for 2017 are expected to increase by between 3.6 to 4 percent over last year. During this busy time of year for e-commerce, it is a good time to reiterate that Congress should not bring back the Marketplace Fairness Act.

American consumers spend hundreds of billions on goods sold over the internet each year. Officially, these consumers are supposed to pay state taxes for these products; however, this isn’t always true in practice. Lawmakers in fiscally challenged states would like to force consumers to pay these taxes to improve their finances, but it would be extraordinarily challenging and expensive to collect taxes on goods sold online.

It would also be a nightmare for many small businesses, because rules on collecting sales tax vary from state to state, and even locality to locality. According to the Tax Foundation, there are roughly 10,000 sales tax jurisdictions in the United States. States’ tax laws are problematic because they often use varying rules to define what is and what is not taxable. Localities also impose different sales taxes in addition to the state rate. The burden to navigate these complexities would be enormous for small online retailers, and it would be a boon for the cyberspace retail giants and big-box stores who are always looking for an advantage over their smaller competitors.

Some states have already passed legislation to force online retailers who have a physical presence in their states to collect taxes in the same way local brick-and-mortar stores do. This has led to loophole-seeking behavior by some consumers seeking to avoid paying sales taxes on their purchases. Shoppers instead have sought out retailers who are outside of such states and not required to collect the tax.

The Supreme Court has recognized all of these different tax jurisdictions would be a burden on interstate commerce. Up until now, online retailers have only had to charge sales tax in states where they have a significant physical presence (Quill Corporation v. North Dakota).

Most Americans are already supposed to pay taxes for the items they have bought on-line tax free whether they realize it or not. Forty-five states have what is called a use tax. Most states rarely go after anyone for not correctly paying their sales taxes; yet, expecting the taxpayers to calculate what they owe and to fill out their tax forms correctly is a completely reasonable expectation.

Internet sales are anticipated to reach $500 billion by 2018 according to Forrester. The prospect of taking more money from taxpayers has enticed the attorneys general from thirty-five states and the District of Columbia to sign onto a letter of support for South Dakota’s legal bid to collect taxes from out-of-state online retailers. The brief makes clear that these jurisdictions are ready to rely on a new electronic consumption tax to fund their local government functions.

As more and more states clamor for such taxes, talks are renewing in Congress to reintroduce the Marketplace Fairness Act, a bill that would force many small online retailers to collect sales tax nationally.

These small businesses would carry the burden of trying to apply such an online sales tax. They would need special software to navigate the varying sales tax rules from each state. They would need to hire more employees to deal fulltime with the software used to calculate the state and local sales taxes. And, they could potentially see their sales drop as consumers once again alter their behavior to find the best price. When costs rise, consumers buy less or look for alternatives. This could lead to many small businesses around the nation, dependent on sales from the internet, going under.

It is no wonder that big-box retailers and online behemoths are advocating for the Marketplace Fairness Act. They already have the infrastructure in place to traverse the tricky taxation landscape from state to state, and they can absorb the costs of complying with the thousands of tax codes around the country.

As these discussions renew in Congress regarding the collection and remittance of online sales taxes, lawmakers should keep in mind that their actions may negatively affect small businesses throughout the American economy. Online corporations and big-box stores have already sent small, independent, family-owned stores the way of the dodo. Passage of the Marketplace Fairness Act or similar legislation would be devastating for mom and pop stores and consumers. It would also not solve the problems that taxpayers face in states with large deficits. Rather they seeking more revenue, these states should be cutting wasteful spending.

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