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News/Politics, The Conservative Rant

The Proposed Internet Tax is Just a Revenue Grabber

We need more of your money!

We need more of your money!

Recently the Senate passed the online sales tax bill, formally known as the “Marketplace Fairness Act,” however, there is nothing fair about this act. It is a back-door way for states to add additional levies on their citizens under the guise of leveling the playing field . From an accountant’s perspective, here’s how:

Most proponents of the bill suggest that there is somehow a dearth of tax revenue from which states are suffering. This sentiment was echoed in the pages of the WSJ by Arthur Laffer. He wrote that, “the exemption of Internet and out-of-state retailers from collecting state sales taxes reduced state revenues by $23.3 billion in 2012 alone, according to an estimate by the National Conference of State Legislatures. The absence of these revenues has not served to put a lid on state-government spending. Instead, it has led to higher marginal rates in the 43 states that levy income taxes.”

This statement is simply untrue. State legislatures have always set their tax rates with the full understanding that they would not collect that supposed $23.3 billion of internet “slippage.” It’s not like there is a line item in state budgets that lists “uncollected online tax” or “tax cheats” with a number attached. Sales tax is one of many levies whose revenues positively fund government spending. This online tax, if passed by the House next and signed into law, will just be yet another tax (and therefore revenue) for the coffers. Higher marginal rates exists because state-government spending levels are higher, not because of some “absence of tax” that forces states to raise rates.

In our states’ budgets, current taxes rates (income + sales, if applicable) are set at levels appropriate to cover the calculations of state spending. 49 out of 50 states require a balanced budget. These states are fully aware that taxes are “avoided” (internet and out-of-state) and therefore don’t count them in their budget calculations. Thus, by passing this new internet tax, you are merely giving the states free reign to add a tax without taking the political heat for it, under the guise of “fairness.”

When looked at it in another way, it is unconscionable for Congress to pass this legislation without requiring that states lower their marginal rates so that the new tax makes everything revenue neutral. Higher marginal rates as they are, already burden taxpayers. This internet tax doesn’t fix anything — because there is nothing in their budgets to be “fixed.” True tax reform (a true “fix”) always means broadening the base and thereby reducing the overall burden of taxes. Instead of that, what we have with this bill is a revenue grab.

Another fallacy for supporters is that including the internet tax in transactions is simply a matter of adding a quick, little tax line where there was none before. But it is highly irrational for legislators to believe that compliance with multiple tax jurisdictions for vendors will be an easy and unburdensome process. The recordkeeping will be excruciating.

This tax nightmare is similar to the 1099 fiasco originally included in Obamacare a couple of years ago, which expanded the reporting requirements to include all payments from businesses aggregating $600 or more in a calendar year to a single payee. Because of the insurmountable amount of reporting and paperwork that would have been associated with it, that provision was swiftly and subsequently repealed.

The effect of distressing our businesses to comply with this online tax collection will be a drag on the economy. Can you imagine vendors needing to figure such things as whether marshmallows are a taxable food/candy in some jurisdictions while it might be a non-taxable food in others? To think that software can seamlessly make this distinction is ludicrous, especially software run by the government. When has the government ever actually streamlined anything? And implementing such a convoluted tax while businesses are already having to deal with sorting out the egregious complexities of Obamacare compliance, will certainly hurt businesses even more.

Internet tax collection for 9,600 local tax jurisdictions or even just 50 states is too much. If such a tax is to be passed, it should either be a tax in which every state accepts one set of rules OR a tax payable to the state-of-sale only — which would ultimately be better for tax competition overall.

The economy is suffering enough, adding yet another tax for citizens, which also requires burdensome compliance for businesses, is not the way to do it. Laffer was correct when he observed that “the principle of levying the lowest possible tax rate on the broadest possible tax base is the way to improve the incentives to work, save and produce—which are necessary to reinvigorate the American economy and cope with the nation’s fiscal problems”. This proposed tax doesn’t do that. In its current form, it is just another revenue stream for our bloated, overspending government.

This is no “Marketplace Fairness Act.” It is an atrocity.

About Alan Joel

Alan Joel has been a CPA for more than 40 years in New York City, where libertarians like him are few and far between. He discusses tax and politics at his popular website, www.taxpolitix.com. You can also find him at RedState, Canada Free Press and Examiner. Join the conversation!

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