The Phony “Fairness” of the Internet Sales Tax

Unraveling Mary Landrieu and the Online Sales Tax Proponents

George CarlinFor a few years now, legislators in the United States have been worrying themselves over the fact that some people have been able to avoid paying sales taxes to them. The internet and competition between jurisdictions have enabled that, and the more the merrier, I say. Constituents already suffer from onerous taxation, and paths for them to get out from underneath the burden should be welcomed not condemned.

Of course, the politicians don’t see it that way, at least the ones who have sales taxes in their states. They’ve been flailing about with “Amazon” taxes which have failed terribly. In North Carolina, for example, their attempt to tax people buying online from out of state saw tax revenues decrease rather than increase. Surprise surprise, many people chose to relocate and terminate their relationships with the state altogether.

Now these legislators are pushing Congress for blanket legislation from the federal level, the Marketplace Fairness Act. The bill, which the Senate has already passed, is both economically shortsighted and dangerous, since it is one step closer to a national sales tax. If passed, retailers in all states, at least those with an online or mail-order presence, would have to begin collecting taxes — regardless of the laws in their particular state.

WGSOCrouereOne federal legislator to support this bill is Louisiana’s Mary Landrieu, and she appeared on Jeff Crouere’s Ringside Politics of WGSO 990AM. Given that she offered the standard proponent justifications, let me address the two most important ones here.

Fairness: This online sales tax would actually create gross unfairness, since online retailers would then have to collect countless taxes based on the destination of the good. There happen to be at least 9,000 of them, and not even specialist organizations can keep up with all of the changing rates. Conventional stores, on the other hand, do not have to ask you where you live or where the good may be going. They only charge one tax rate or none at all.

National Taxpayers UnionAlthough not ideal, the National Taxpayers Union has recommended a superior alternative, an origin-based tax that would be fair. (See “Myth #8.”) They only support this as a least worst option, since it would still raise the tax burden. If the federal government must get involved, however, let businesses charge all customers one rate of tax, based on the jurisdiction in which the seller is located and not based on a maze of jurisdictions across the country.

Not a new tax: Does anyone, other than political peddlers, seriously believe this? Presently, state legislators have no legal authority to impose taxes on retailers in other states. This would give such authority and would plainly impose a new tax on those very retailers. Not only would it transfer more wealth to government bureaucrats and create a nightmare of paperwork and costly enforcement, it would be taxation without representation, since people with retail stores in other states cannot vote on the taxes they would have to collect.

That this has passed even one chamber indicates the desperation of legislators at both the state and federal levels. Their obstinate push to expand their taxing powers will only backfire, since it will be yet another deterrent against investment in the United States, and it will promote both the gray market and internet sales from across international borders.
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Fergus Hodgson About Fergus Hodgson

Host and founder of The Stateless Man radio show and blog. Follow @FergHodgson.

25 comments
JessieCanty
JessieCanty

 "This online sales tax would actually create gross unfairness, since online retailers would then have to collect countless taxes based on the destination of the good. There happen to be at least 9,000 of them, and not even specialist organizations can keep up with all of the changing rates."

The marketplace fairness act specifies that in order for states to participate in the program, they have to provide the retailers with free software to calculate, collect and distribute the taxes. In most cases this will be taxcloud, which can be automatically integrated into the checkout system. I've looked into it myself, and it's quite a bit easier than the pen and paper method that I use. The MFA also specifies that retailers can not be held accountable for errors due to the software. 

You seem to suggest that these retailers would be doing this all by hand, which is far from the case. In fact, the supreme court has ruled on the subject in the past and found interstate sales taxes to be constitutional, but not possible to enact due to the difficulty in calculating and distribution. The software fixes this, and it's the only reason the MFA won't get struck down. 

Robert
Robert

"it would be taxation without representation, since people with retail stores in other states cannot vote on the taxes they would have to collect."

Wow, didn't really think that through, did we?  The retailer isn't paying the tax, they are merely collecting it.  The consumer is paying the tax and they do vote for their representatives so, yes, they are represented.

James Hogwood
James Hogwood

Mr Hodgson,

Before I comment, let me say that I work for an on-line retailer in Leavenworth KS. I am the shipping manager at Marlow White Uniforms - you can learn more about us here:

www.marlowwhite.com

We sell dress uniforms to career soldiers and first responders all over the country. Approximately 75% of our customers shop with us via our website. Most of our orders are shipped to soldiers - even in deployment - to military bases and homes in all fifty states. We also ship to military bases outside the US such as the 2nd ID headquarters in South Korea and to the bases with our allies in Germany, France, Great Britain etc.  We have a showroom just outside Ft Leavenworth and we recently opened a showroom in Woodbridge VA just outside DC. As the laws currently stand, we must charge a county based sales tax to all our Kansas customers and a straight 5% tax to all Virginia customers because we have stores in both states.

The complications are immense. Soldiers move around a lot. What if a soldier orders his uniform while he's based at Ft Wainwright in Alaska, and then gets orders to move to Schofield Barracks in Hawaii before his order is shipped? What state gets the tax then? 

What is especially hateful about this law at my job is that all the money that soldiers, cops, firemen, EMTs etc spend upon their dress uniforms is taxpayer money in the first place! So now the tax is double - the soldier's uniform stipend comes from the public purse, and then when they spend that money to purchase their dress uniform they get taxed again?

I read that there is a provision in this law that exempts businesses that have less than fifty employees. We have forty-five full time employees where I work, and now there is a huge disincentive to grow too much lest we cross the line and become subject to the maze of recipient specific tax rates.

Furthermore, it's not like each region has a seperate rate, there is much more to it. Virginia, for example, does not require a business to charge sales tax on SERVICES - like alterations, sewing, labor etc - all the things we need to do to make the uniform fit just right. We must charge tax on the uniform itself, but not upon the labor. Note that every state has different rules for this kind of thing.

Mr Hodgson, I listened to your 'cast and read your article. I fully agree with your points about the myth of fairness and especially the point about taxation without representation. I just wanted to chime in, as a professional shipper who sells goods to our public's greatest heroes. 


Thank you,


James Hogwood

Marlow White Uniforms Inc


BarkingUnicorn
BarkingUnicorn

Fergus, you do not understand this subject at all or you are flat out lying.  Retailers don't pay sales taxes, they collect them from buyers and remit them to the State.  This bill does not authorize any new tax on sellers; it authorizes only the collection and remittance across State lines.  The bill puts all of the burden on the States and requires them to provide free software to sellers that does everything required.  That software has been around for years:   see TaxCloud.com for one example.  Does it all; plugs into many popular e-commerce programs; and is totally free to sellers.  The company is paid a commission by the States on taxes remitted.


grunch
grunch

Yeah, Congress wants to tax the people using the internet to buy and sell hand-made hair scrunchies.  Anything to avoid raising taxes on their buddies the corporate fatcats.

The Stateless Man
The Stateless Man moderator

Hey @JessieCantyI will say that this engagement is great and sharpens one's thinking on the matter. Thank you.

Someone already raised this point, and another commenter and I addressed it. Any mail-order business with print catalogs cannot simply use a plugin. Further, that businesses would have to rely on government agencies for website plugins suggests we have gone way to far in terms of tax complexity. I think you would agree that the United States already has a terrible problem in that regard.

As you might have read, if fairness is the true goal, there is a superior alternative. That is an origin-based sales tax, as recommended by the National Taxpayers Union. Cheers.

The Stateless Man
The Stateless Man moderator

Hey @Robert Thanks for engaging with the page. I suspect you are aware that labeling does not reflect the actual incidence or burden of a tax — both in terms of the revenue transfer and the compliance costs. The magnitude of the incidence on the retailer depends on the relative demand and supply elasticities at play and the subsequent price change.

This page explains it in more detail: http://www.econport.org/content/handbook/Elasticity/taxincidence.html.


In terms of representation, you are correct that federal representatives may well give that authority. However, the point remains that people in other states would have to comply with the tax imposition of representatives in other states, representatives which they did not vote for.

Thanks again for your comment.

Bo Raxo
Bo Raxo

@Robert Good point.  And since this is a federal law, then unless you're in Washington DC, you do have representation.

Bo Raxo
Bo Raxo

@James Hogwood 1. If you do more than a million dollars a year in gross sales, you're subject to this.  So no, the "5o employee" thing isn't real.  Perhaps you're thinking of the Affordable Care Act. 

2. Software, how does it work? Based on the shipping address, the tax is calculated.  If you change the shipping address, you probably need to recalculate the shipping charges, too. Software is marvelous for that. 

3. Yes, government employees are paid with tax dollars.  And they pay income taxes - imagine that. They pay sales taxes. You don't seem to get that money can get taxed when it changes hands.

4. Legally those fine sailors and EMTs and everybody else are supposed to pay that sales tax. Do you know how complicated that is for them?  Or, they're just cheating on their taxes by not paying it. This is doing them a favor, actually. Don't you think it's easier to just implement in your tax software - or use an outside service - than to make all of your thousands of customers do it on their own?

James Hogwood
James Hogwood

@BarkingUnicorn There is no such thing as free software. The vendors of the tax-friendly POS and click-and-ship fulfillment systems are paid by the very taxes their state legislatures are hoping to collect. Furthermore, it is quite arrogant and naive to say that a serious on-line retailer uses a cloud is just stupid - it is way too slow. I speak from experience, having worked over 15 years in shipping. Any on-line retailer who has a hope of growth can't rely upon the very slow and laggy web-based ship software that is full of bugs and totally sucks. Your example does not "do it all" - your claim is false.

The Stateless Man
The Stateless Man moderator

@BarkingUnicorn Thanks for stopping in, sir. If you want to believe that retailers are not paying sales taxes, even though they are the ones who send the checks, you're welcome. I encourage you to look into the economic term, "tax incidence," by the way. http://www.investopedia.com/terms/t/tax_incidence.asp.

That you would suggest people in-state are the only ones paying is ironic and is consistent with the confused argument offered by other proponents. To bolster their case, they will suggest that it is new money coming from outside the state — but then they also want to say that it is not a new tax.

I suppose that plugin works for mail-order catalogs too.

Bo Raxo
Bo Raxo

@grunch No, any business that does less than a million dollars a year in sales is exempt.

JessieCanty
JessieCanty

@The Stateless Man @JessieCanty 

"
Any mail-order business with print catalogs cannot simply use a plugin. Further, that businesses would have to rely on government agencies for website plugins suggests we have gone way to far in terms of tax complexity. "

Your article isn't about mail order businesses, it's about internet sales. And the fact that businesses have to rely on plug ins from the government is beside the point. You made a suggestion in your article that these companies would be doing this without assistance, and that's pretty dishonest. 

If the point that you wanted to make was that having to use the software means the system is too complicated, then you should have made that point to begin with. There's a huge difference between saying that and saying that these businesses will have to handle all these calculations on there own, which is effectively what you did. 

JessieCanty
JessieCanty

@The Stateless Man 

"
In terms of representation, you are correct that federal representatives may well give that authority. However, the point remains that people in other states would have to comply with the tax imposition of representatives in other states, representatives which they did not vote for."

This is why you're a writer, and not a business person. 

I own a business in my home state, but I'm a resident of another. I don't get to vote on my state's taxes just because my business operates there. We operate in two cities, so even if I could vote in  my own city's election, I'd still have no say in the other city's taxes. My situation isn't unique. In order to have complete representation when it comes to sales taxes, you'd have to operate only in your own state, your own county, and your own city. 

Having access to a market means you deal with the taxes that come with. The argument that we shouldn't pay or deal with taxes that we didn't vote for holds no water. 

Robert
Robert

@The Stateless Man 

I'm not interested in playing word games with "tax".  Your overly-broad definition would make any law or regulation a tax since it costs somebody something at some point.  That's just silly and makes you sound extreme.

This bill is about levying state taxes, not federal.  Your state representatives levy those taxes.  There is no taxation without representation.

The people in other states would have to comply with a federal law that regulates interstate commerce.  It most certainly is within the federal government's power to enact such a law.  If they, the retailers, don't like that burden, they should let their federal representative know.  Everyone is being properly represented here.  This talking point is a loser.

A better point is that this law does not reflect reality or fairness.  Pretend that you travel to another state and buy a pair of pants at a store.  You don't plan on using those pants in that state but in your home state.  Whose state tax do you pay?  Fairness would dictate that it's your home state's when, in reality, you pay the foreign state's sales tax (if any).  To be truly fair, that retailer should collect your home state's tax. 

Now suppose that you buy some ice cream that you plan on eating in that foreign state.  What tax do you pay now?  Because you plan on using the good in the other state, it should be the other state's tax.


Now suppose that you purchase a car out of state.  Currently that state does not collect any sales tax.  Instead, its your home state's responsibility to collect it (which you typically pay when you register the car).  Why are cars, ice cream and pants being treated differently? Why are brick and mortar and internet transactions being treated differently?


If this bill was "fair" it would require brick and mortar retailers to comply with the same tax policies as internet retailers, yet it does not.

BarkingUnicorn
BarkingUnicorn

@James Hogwood @BarkingUnicorn Who made the buggy software that your firm uses?  If it is Web-based, where is the Web server upon which the software resides?  What kind of Internet connection do you use to reach that Web server?  If you can answer these questions, I' might believe you know more than just how to click icons and supervise order pickers.  The States are required to provide software to sellers free of charge; your semantic tap-dancing only makes you look foolish.

Bo Raxo
Bo Raxo

@James Hogwood @BarkingUnicorn Are you kidding?  Do you know how many large firms use web-based software like Salesforce and Ariba? Do you realize that calculating charges like tax and shipping can be done in batches?  I work for a place with over $4 billion in revenue, and we use web-based software for procurement, handling about half of our receivables, all of our payables. Buggy? These are systems used by Fortune 500 companies - they're pretty solid.

BarkingUnicorn
BarkingUnicorn

@The Stateless Man @BarkingUnicorn I see; my employer pays income and FICA taxes on his payroll because he mails a check to the government each quarter.    But I get a tax refund at year's end, or pay what he didn't.  Nonsense. 


BarkingUnicorn
BarkingUnicorn

@Bo Raxo Actually, a million/year in interstate sales. Do $10 million total and $500K interstate, and this law has no effect on you.



The Stateless Man
The Stateless Man moderator

Dear @JessieCanty Please do not put words in my mouth. I did not make "a suggestion in [my] article that these companies would be doing this without assistance." The point was that some companies would be paying taxes in thousands of jurisdictions rather than just one, as is the case with conventional retailers. Cheers.

The Stateless Man
The Stateless Man moderator

Hey @JessieCanty @The Stateless Man Thanks for engaging with the page. Actually, I have conducted business across many different jurisdictions, and the complications that arise from such activities are one basis for this radio show and e-newsletter.

You raise an excellent point that you may not be a resident where you are in business — as I am not a citizen of the United States, for example — and therefore do not get to vote on the legislation. That could open up a much broader topic, but the particular instance we are speaking of is when both the resident and the business have no physical presence in the state. Cheers.

The Stateless Man
The Stateless Man moderator

Good morning @Robert You are welcome to call basic economic logic word games. However, the reality is that if you think a sales tax is only paid by customers and not retailers, you have accepted the word game of the legislators. Would you simply say that it was a tax on retailers if legislators renamed it the retailers tax without any other changes?

It is levying state taxes, on constituents in other states — both the burden and the compliance.

The constitution does allow federal regulation of interstate commerce. However, you appear to be ignoring the fact that this would be an enormous expansion or thickening of power for state legislators, over people not within their jurisdictions — whether constitutional or not.

Regarding the fairness of paying sales taxes in other states, the state where the transaction takes place is receiving the return. Given that the internet breaks the clear location of a transaction, it does not have as clear of a tax obligation — although your final point echoes what I said in the article.

Thanks again for your comment.

The Stateless Man
The Stateless Man moderator

@BarkingUnicorn Thanks again for your comment.

You appear to be basing the incidence of a tax on account of the paperwork conventions or political claims, rather than actual economic incidence. Consider the Social Security tax (OASDI) as an illustrative example. According to statute, employers pay 6.2 percent and employees pay 6.2 percent for a combined tax of 12.4 percent.

However, that is merely a paperwork. The actual tax imposition means that there is an additional 12.4 percent gap between take-home pay and the cost of labor. It may well be the case that employers can deduct almost the entire 12.4 percent from what wages would have been otherwise. Or maybe there is such resistance in the labor market that they are hardly able to lower wages at all to make up for the 12.4 percent.

We could re-write that law to simply have the entire 12.4 percent appear on either your wage slip or to have none of it appear on your wage slip. It makes no difference to the incidence, since the gap remains the same, and it will have to come out of both wages and employer expenses, the portion of which is determined by relative elasticities of supply and demand.

Either way, whenever you apply a tax on the transaction, some incidence will fall on both parties; only the portion of incidence will vary — except in the theoretical situation of perfect elasticity or inelasticity.

In the case of the sales tax, the retailer has some capacity to raise his final price to cover the tax, but not entirely — otherwise his sales would decline. That, along with the compliance costs, is his incidence. I hope that helps, and if you want to learn more, this article explains it well: http://www.econport.org/content/handbook/Elasticity/taxincidence.html.

I appreciate your engagement with the page.