Congressional Republicans led by Sen. Mike Enzi of Wyoming and Democratic Sen. Dick Durbin of Illinois, are about to raise Americans’ taxes and set in place the foundation for states to be able to tax downloads from the Internet, including from places like iTunes.
The tax sounds innocuous enough. The tax is hiding under legislation called the Marketplace Fairness Act. The act purportedly just harmonizes state laws so Internet sales are also taxed. After all, it is not fair that Amazon does not charge all its customers sales taxes. It puts them at a competitive advantage over mom and pop shops. Sounds good until you realize what’s actually going on with this latest scheme to peddle “fairness.”
The MFA is written by states craving more money and massive corporations like Wal-Mart and even Amazon.com who want to hurt small businesses that have become successfully competitive against big retailers online. In selling the MFA, these big businesses and governments have hired lobbyists to claim the law actually benefits small businesses. But the backers are a who’s who of major corporations that have a history of using their connections in government to hurt small businesses that have figured out how to successfully compete against big businesses.
The nation has thus far successfully shielded the Internet from Washington taxation and regulation for decades, and the MFA would break the floodgates open. Even more troubling, the MFA establishes a pretty solid precedent that the federal government can step in to regulate state tax policy. After all, this legislation attempts to exert federal regulatory power over state Internet tax policy with state complicity.
Once Congress has opened the Pandora’s Box of federally authorized Internet sales taxes, it is only one step away from taxing Internet downloads, not just goods purchased online.
The Supreme Court has long held that a business has to have some physical nexus in a state to be subject to sales tax collections -- a storefront, distribution center, etc. This is based on the fundamental principle of no taxation without representation.
States have tried to weasel their way around this, but each state taxes goods in different ways. Some states, for example, don’t tax baked goods, but do tax candies, even if made in a bakery. So your cake is not taxed, but if you buy fudge at the bakery it is.
And it’s not just states, there are over 7,500 different local tax systems, many with special tax holidays or exemptions for different products. Trying to move these varied tax systems to the Internet would drive up the burdens of businesses online by forcing compliance with the various taxing schemes of 50 states.
That actually puts a heavier burden on online vendors than brick and mortar local vendors, who only have to comply with the taxes of the state they reside in. Then there are the compliance costs. How does a candy company in Georgia that sells fudge to someone living in Iowa handle a tax dispute with Iowa tax authorities?
MFA would destroy the concept of states as laboratories of democracy that allow businesses to move between states based on better business environments. Today, a business located in New Hampshire charges no sales tax, but if MFA passes, overnight they could be forced to collect taxes for dozens of states with no escape.
There is a carve out for businesses that sell less than $500,000 a year online. As former Sen. Jim DeMint, R-S.C., noted last year, this is a pretty good admission that the law will be a burden on businesses.
Erick Erickson is a Fox News contributor and radio talk show host in Atlanta.