Complexity, Compliance Costs Fatal to Free-Market Case for Amazon Tax

Turning Vendors into Tax Collection Agencies, and Tilting the Playing Field

Taxation of the internet is controversial among those who seek a freer way to fund state functions, and with good reason. The normal knee-jerk reaction to any new or proposed tax is outrage: given the spider’s web of confiscatory taxes that already exist, any more come across as unacceptable from the get-go.

Recently, the National Center for Policy Analysis weighed in and released a report on the Marketplace Fairness Act (MFA). Passed by the US Senate but languishing in the House, this would require internet companies to tax online sales and then remit the revenues to the buyers’ home states — what many states have already attempted to do on their own, with little success (see the image). Colloquially, this is known as the “Amazon tax,” after the ubiquitous online retailer that has managed to avoid state sales taxes in many instances.

Source: Institute for Local Self-Reliance

The problem is that such taxes do not exist in a vacuum. A sound, fair tax system tends to maximize certain qualities that are not present in the current system.

First, transparency: a tax should be clear to the person paying it, not hidden, such as the employer side of Social Security and Medicare taxes.

Second, simplicity: a tax should be understandable to all payers.

Third, a broad base: no specific carve-outs for favored activities, products, or groups.

Finally, a low rate: this minimizes the overall tax burden and the associated deadweight losses.

All these principles lean towards a broad, consumption-based tax model (as opposed to income based) and comparatively low rates with minimal carve outs — ideally with an an easy-to-administer framework.

Does that sound like anything you’ve heard of? Yes, a sales tax applied to effectively all goods and services sold in a state. There is, therefore, a reasonable argument that extending state sales taxes to online retailers is a good thing for those who truly support free markets.

Well, not quite. State tax systems are not nor will they ever be perfect with nice, pretty consumption bases and low rates. Compliance costs also enter the equation and are too often forgotten.

The MFA would, as the NCPA study notes, force online companies to collect taxes for nearly 10,000 different jurisdictions. This is not a problem for the oft-mentioned giant of online retail, Amazon. For small online retailers, though, the story is far different.

Imagine being a young entrepreneur, attempting to sell your product online, but you need to send taxes to every single jurisdiction in every state that one of your customers orders from. Without a doubt, the MFA would raise the cost of entrepreneurship and barriers to entry, something that most can agree is a terrible thing.

Online sales taxes aren’t all bad, but this proposal for one definitely is. The NCPA study ends with an excellent quote that distills the situation well:

States may have legitimate concerns in collecting sales tax from online vendors and leveling the playing field between them and brick-and-mortar stores, but the Marketplace Fairness Act is not the way to accomplish those goals. The MFA essentially punishes vendors by requiring them to collect taxes, which is government’s job. States with use tax laws on the books should use their own taxing authorities to enforce compliance rather than burden the private sector with the task.

1 comments
stenrw
stenrw

The Marketplace Fairness Act wen enacted will make it much much easier for small businesses like mine to automate sales tax already due in all 46 states with sales and use tax policies. Today, thanks to the Streamline Sales and Use Tax Agreement 23 states have simplified there sales tax rates and definitions making it simple for small businesses to calculate, collect and remit sales taxes for those thousands of jurisdictions. Processing sales tax in my home state was a daunting and expensive task. Just as dealing with shipping used to be prior to "there is an app for that." 


Today, thanks to freely available modern technologies pre-integrated in to shopping carts sales tax is breeze, and even better it saves my company valuable money and time. No longer do I pester or pay my accountant or bookkeeper to deal with the remedial task of sales taxes. Needless to say both my accountant and bookkeeper are ecstatic! Even better, since I use a Certified Service Provider (CSP) my company receives indemnification against any immediate audit issues. 


The most important thing to understand is Federal Legislation simply granting States' rights to collect sales tax already due will require non streamlined (non certified) states to update and simplify their tax policies prior to being granted collection authority. 


Lawmakers have been battling with this issue before the Internet existed. Today Internet technologies are more than capable than ever to deal with remedial tax processing. Heck, sales tax processing today is much much simpler than dealing with the burdens involved in shipping goods.


This is one issue I would expect everyone to rally behind. For the past decade as Internet sales and evaded sales taxes continue to escalate so have states' income, property, and various fees and taxes increased. States are compelled to increase other taxes and fees in order to compensate for the increasing levels of evaded sales taxes enabled by the Internet. Sales taxes funds many emergency services and infrastructures in many states. The same services and infrastructures guaranteeing the safe and efficient delivery of Internet sold goods to doorsteps and mailboxes. It is in everyones best interest to honorably remit sales taxes already due in order to maintain our vibrant communities and foster an expanding vibrant marketplace for all merchants to profit. 


Arguing for an average 6% price advantage by maintaining outdated tax policies hurts everyone. Especially when freely available modern technologies enable sales tax automation provider greater efficiency, lower costs, and reduces liabilities for businesses.