Taxation of the internet is controversial among those who seek a freer way to fund state functions, and with good reason. The normal knee-jerk reaction to any new or proposed tax is outrage: given the spider’s web of confiscatory taxes that already exist, any more come across as unacceptable from the get-go.
Recently, the National Center for Policy Analysis weighed in and released a report on the Marketplace Fairness Act (MFA). Passed by the US Senate but languishing in the House, this would require internet companies to tax online sales and then remit the revenues to the buyers’ home states — what many states have already attempted to do on their own, with little success (see the image). Colloquially, this is known as the “Amazon tax,” after the ubiquitous online retailer that has managed to avoid state sales taxes in many instances.
The problem is that such taxes do not exist in a vacuum. A sound, fair tax system tends to maximize certain qualities that are not present in the current system.
First, transparency: a tax should be clear to the person paying it, not hidden, such as the employer side of Social Security and Medicare taxes.
Second, simplicity: a tax should be understandable to all payers.
Third, a broad base: no specific carve-outs for favored activities, products, or groups.
Finally, a low rate: this minimizes the overall tax burden and the associated deadweight losses.
All these principles lean towards a broad, consumption-based tax model (as opposed to income based) and comparatively low rates with minimal carve outs — ideally with an an easy-to-administer framework.
Does that sound like anything you’ve heard of? Yes, a sales tax applied to effectively all goods and services sold in a state. There is, therefore, a reasonable argument that extending state sales taxes to online retailers is a good thing for those who truly support free markets.
Well, not quite. State tax systems are not nor will they ever be perfect with nice, pretty consumption bases and low rates. Compliance costs also enter the equation and are too often forgotten.
The MFA would, as the NCPA study notes, force online companies to collect taxes for nearly 10,000 different jurisdictions. This is not a problem for the oft-mentioned giant of online retail, Amazon. For small online retailers, though, the story is far different.
Imagine being a young entrepreneur, attempting to sell your product online, but you need to send taxes to every single jurisdiction in every state that one of your customers orders from. Without a doubt, the MFA would raise the cost of entrepreneurship and barriers to entry, something that most can agree is a terrible thing.
Online sales taxes aren’t all bad, but this proposal for one definitely is. The NCPA study ends with an excellent quote that distills the situation well:
States may have legitimate concerns in collecting sales tax from online vendors and leveling the playing field between them and brick-and-mortar stores, but the Marketplace Fairness Act is not the way to accomplish those goals. The MFA essentially punishes vendors by requiring them to collect taxes, which is government’s job. States with use tax laws on the books should use their own taxing authorities to enforce compliance rather than burden the private sector with the task.