3 Reasons to Hate the Internet Sales Tax Bill

Designed to level the playing field between traditional and online retailers, the Marketplace Fairness Act has three big faults that you're sure to dislike.

Sean Williams
Sean Williams
May 9, 2013 at 6:00PM
Consumer Goods

The Marketplace Fairness Act, perhaps known better as the Internet sales tax bill, is creating quite the uproar in Congress and among the public. The bill, which is designed to allow states and local governments to require Internet companies with greater than $1 million in out-of-state sales to collect sales tax from consumers, gained overwhelming support from the Senate earlier this week, passing by a vote of 69 to 27.

However, this bill isn't as simple as one party versus another. This bill is so polarizing that it's pitted members of the same party against one another, with public opinion even more all over the place. Its implementation, though, could mean the difference between $22 billion to $24 billion in annual online taxes going uncollected and that money being funneled into state and local governments. While the bill is only 11 pages long, the reality of the Internet sales tax bill is that it's considerably more complicated than what you see on the surface. 

This is why I broke down the bill yesterday and highlighted three reasons you can welcome its proposed implementation with open arms. While you may not agree with those reasons, they are nonetheless valid benefits to the bill if it passes.

But, as each coin has two sides, the Internet sales tax bill also has three big faults which could have consumers and members of Congress loathing its potential implementation. Here are the three biggest reasons to hate this bill.

Reason No. 1: It taxes consumers at a very fragile time in the economic recovery process.
I'm willing to bet there isn't a single consumer out there who actually wants to pay more in taxes. Sure, people "understand" that higher taxes and spending cuts are needed in order to balance the budget, but when push comes to shove they'd rather not pay any more out of pocket than they have to.

However, the Internet sales tax bill would hit the Internet shopping consumer pretty hard at a time when cutting corners is a must. For most Americans the elimination of the payroll tax holiday removed additional pay from their weekly or monthly paycheck. In addition, Internal Revenue Service furloughs designed to cut federal costs delayed tax refunds for millions of Americans.

The result of higher taxes and delayed refunds has yielded very discouraging sales results from many retailers. Wal-Mart (NYSE:WMT), for example, delivered weak guidance in February, citing tax refund delays as one of the key reasons for sluggish sales -- and it's the largest retailer in the world. If Wal-Mart is struggling given its immense pricing power, imaging how online retailers and consumers are going to struggle if they lose the ability to "cut corners" by purchasing online and avoiding sales tax (where applicable).

Reason No. 2: It exposes online retailers to audits and other accounting inefficiencies.
For Alaska, Delaware, Montana, New Hampshire, and Oregon, it'll be business as usual regardless of whether or not this bill is signed into law. For the other 45 states that do collect sales tax, many are struggling to generate revenue sufficient to balance their state's budget and would be eager to ensure that Internet-based retailers are complying with the bill.

What this means for Internet retailers like Amazon.com (NASDAQ:AMZN) and eBay (NASDAQ:EBAY) is that they could be required to comply with as many as 45 separate state audits, annually! If that's not a complete waste of money, then I'm not exactly sure what is.

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From the states' standpoint I can understand wanting to collect all sales tax revenue their owed, especially with many states running in the red. However, with the federal government implementing the law, it seems tedious to push the onus of the audit and implementation to the state and local governments, which could each approach the situation from a different angle. We've become accustomed to government inefficiency over the decades, but with 9,646 separate tax jurisdictions in the U.S., making sure each one is properly followed by online retailers is certainly one of the scarier examples of inefficiency that could arise from this bill.

Overstock.com (NASDAQ:OSTK) CEO Patrick Byrne couldn't agree more, noting in an interview with Reason.TV in 2009 that it's not reasonable to expect an online retailer to keep up with thousands of jurisdictions, since products could be classified differently depending simply on the jurisdiction. Byrne also went on to note that Internet retailers place less of a burden on local infrastructure than big-box retailers, which require schools, roads, sewers, and other things be built or maintained in order to maintain the employee base.

Reason No. 3: It places small businesses at a big disadvantage.
Building on the second reason, perhaps the most damaging aspect of the Internet sales tax bill is that it could severely hamper small business growth in multiple ways.

President Obama visits Mast General Store in Boone, N.C. Source: White House on Flickr

The first problem is those aforementioned audits. Amazon.com already has offices and distribution centers in a growing number of states, so it's well acquainted with adjusting to state and local tax codes. But both eBay and Amazon are large enough and generate enough cash flow to hire a consortium of lawyers and accountants to ensure that they would pass an audit. However, a small business with just a few million dollars in out-of-state revenue is going to be crushed by the legal implications of this bill alone. It's no wonder that Amazon.com has come in support of the Internet tax bill -- it would ensure that most of its smaller competitors get squashed by audit costs!

Then there's the jobs problem that counters the benefit we discovered yesterday. While the Internet tax bill could protect existing brick-and-mortar store jobs, it'll almost assuredly constrain hiring and could even lead to job losses for small businesses reliant on Web-based sales. With many small businesses running in the red in an effort to expand when they're small, the added act of collecting sales tax from customers could be enough to turn consumers away from purchasing online, which would undoubtedly hurt sales, stymie growth, and could even put smaller Web-based companies out of business.

If anything, the Internet sales tax bill locks in the advantages of big-box and large-scale e-tailers, but places small businesses at an even greater disadvantage.

What's your call?
Now that you've had a look at both sides of the issue, where do you stand with regard to the Marketplace Fairness Act?