There are few pieces of legislation that have worked their way through Congress over the past couple of years that are as polarizing as the Marketplace Fairness Act. Also known as the Internet sales tax bill, this measure would allow states to force online retailers with more than $1 million in annual out-of-state sales to collect sales tax from their customers, and then turn that tax over to state and local governments.
Needless to say, the bill has a fair number of supporters and also plenty of opposition. Supporters of the bill argue that imposing a tax on Internet sales would only be fair since state and local governments already collect tax on brick-and-mortar businesses. Those who oppose the bill point out that it gives the federal government too much power in state and local government tax affairs and could subject online retailers to a slew of state and local audits.
Regardless of which side of the aisle you're on, there are both positive and negative aspects to the bill. Today, I intend to look at three reasons you should welcome the Internet sales tax bill with open arms. Later in the week I'll look at the other side of the coin and point out its faults.
Reason No. 1: It will give brick-and-mortar retailers new life.
The clear winner of this type of legislation would be brick-and-mortar retailers that have been previously crushed by the "showrooming effect." One of the best examples of this is big-box retailer Best Buy (BBY -0.81%), which has seen sales slow as consumers used its stores to figure out which items they wanted to buy, then turned to online retailers such as Amazon.com (AMZN -1.64%) and eBay (EBAY -0.14%) for their purchases since the sale price was often lower and, as a bonus, there was no sales tax in most instances.
The disadvantage to brick-and-mortar retailers is that they're required to pay tax in each state that they operate in. Best Buy has stores in all 50 states; therefore it pays taxes in, you guessed it, 50 states. Amazon.com and eBay, on the other hand, are only required to collect tax in states where they have offices or distribution centers. This leaves a vast majority of states in the gray area where they aren't required to collect taxes from consumers, giving both quite the comparative advantage over traditional retailers.
The Internet sales tax bill would close this "loophole" and allow brick-and-mortar retailers to get back on level ground with Internet retailers. Best Buy is already trying to do this with its new price-matching policy, but this bill would certainly expedite matters.
Another way of looking at this is that it could keep thousands of brick-and-mortar jobs secure. With most online retailers losing their huge comparative advantage, it would free up traditional retailers to focus on expanding their brand, enhancing their product offerings, and focusing on the service that once made them great.
Reason No. 2: It will encourage competition and innovation.
One of the most interesting factors about breaking down the huge advantage that online retailers currently have over traditional retailers is that it would likely encourage innovation at a considerably faster pace than we're seeing now.
Again using Best Buy as an example, the big-box retailer saw sales of its televisions and other appliances sink like a stone in recent years because it never really adapted its game plan. Being bigger and having a wider selection than its smaller peers, Best Buy simply relied on it size and expected that the products would eventually sell themselves. It wasn't until Amazon and eBay changed the game through price undercutting and expanded online electronics offerings that put Best Buy's in-store selection to shame that Best Buy began to shift its strategy. Recently, the company has turned the tables by shrinking its square footage, opening mobile-focused centers to drive traffic, and incentivizing its associates to make sales. Had this online competition not existed, Best Buy's complacency might have gotten the better of them.
With the sales tax bill leveling the playing field between online retailers and traditional retailers, the fight for customers should only intensify, which is rarely bad for consumers. What I'd expect to see is a combination of discount and loyalty battles between these types of retailers. As you might expect, online retailers will focus on their larger inventory capacity and use discounts to sway consumers. Brick-and-mortar retailers will emphasize the ability to touch and feel products in their stores, as well as loyalty reward credit and store cards, to keep consumers coming back. Any way you look at it, this is a win-win for the consumer.
Reason No. 3: It will generate $22 billion to $24 billion in annual revenue.
Unless you've been hiding under a rock, you're probably well aware of the fact that our national debt is quickly approaching $17 trillion. Federal budget deficits in recent years have run in excess of $1 trillion per year as the government has tried everything under the sun to stimulate a struggling economy. With the economy finally gaining some traction, the need to cut back on spending, as well as generate more revenue from taxes, is now front and center. You might say Uncle Sam needs your tax money now more than ever.
Source: Painting by James Montgomery Flagg.
If you recall, the last couple of debt-ceiling debates Congress has have ended in almost circus-like fashion. Rather than dealing with the issues at hand, politicians on both sides of the aisle merely swept the problems under the rug to be dealt with later. A lack of meaningful resolution led to the imposition of sequestration earlier this year, which necessitated $85 billion in federal budget cuts and temporarily spooked investors.
The Internet sales tax bill won't be an overnight cure for the nation's bleeding checkbook, but it will add in the neighborhood of $22 billion to $24 billion in annual tax revenue to state and local governments. That's great news at a time when funding across many social programs is scarce. In addition to the added revenue, it could also calm investors a bit as the funding gap -- assuming Congress keeps spending where it's at now -- would close just a bit more. I repeat, this isn't a cure to the nation's budget deficit, but it's a solid step in the right direction.
Onto the House
Admittedly the Internet sales tax bill is still a long way from becoming law in spite of a passing vote (69 to 27) in the Senate on Monday. Opposition in the House of Representatives stands firm against the bill, yet, as I alluded to above, the opposition isn't just based on party affiliation. Whether or not this is the first of many attempts to enact a universal Internet sales tax, I can say with certainty that consumers have some pretty undeniable reasons to love this bill if it's eventually signed into law.
Stay tuned as later in the week I'll dig into some of the potential pitfalls of this bill as well.
