Marketplace Fairness Act is unfair

The U.S. Senate, with the support of New Mexico's Martin Heinrich and Tom Udall, recently passed legislation called the "Marketplace Fairness Act."

The idea is to set up a new taxation regime that would allow states to collect sales taxes on all online sales.

The U.S. Supreme Court's Quill decision of the early 1990s established that online merchants must collect all sales taxes due if they have a physical presence in a particular state, but "mom and pop" merchants are not forced to act as tax collectors for the 9,600+ taxing jurisdictions throughout country.

Bernalillo County alone has 24 taxing districts. There are easily more than 100 statewide.

The complexity point is key. The Court decided the burden of forcing a small business to collect taxes at so many different rates with products defined differently, and with documentation required on a variety of schedules and in different formats, was unreasonable.

The Marketplace Fairness Act would require the creation of a complicated and expensive system for tracking where consumers live, what they buy and how much it costs.

One Albuquerque-based business owner has stated he would no longer sell his product online under an Internet taxation regime as set up under the Marketplace Fairness Act. The issue is not an unwillingness to have his consumers "pay their fair share," but the compliance costs that involve submitting documentation, often on a monthly basis even if his company has no sales in that particular jurisdiction.

He is by no means the only small business owner to face negative repercussions from Congressional overreach on Internet sales. It is one big reason why Ebay, Etsy, and their small, but numerous sellers oppose the Act while the online behemoth Amazon has become one of its primary advocates.

Of course, many governments are hungry for the revenues that Internet taxes would bring in. Many of them argue these taxes will force online retailers to "pay their fair share" for services they use.

The reality is Internet merchants don't burden local infrastructure like traditional retailers. These companies, not the online retailers, are using the roads, sewers and schools.

Rather than burdening small businesses with additional compliance costs, states should consider shifting to an "origin-based" sourcing rule for sales taxes.

A destination-based sourcing rule requires businesses to collect sales tax de?ned by the physical location of the buyer, whereas an origin-based sourcing rule would require sales tax collection de?ned by the physical location of the seller. After all, if the seller is burdened with collecting taxes on behalf of the government, the revenues generated should at least be used in part for the benefit of that seller.

Better still: unlike the Marketplace Fairness Act, which relies on collusion among the states and thus requires the blessing of Congress, the origination-based approach encourages federalism and competition among the states to be as attractive as possible for potential Internet vendors.

Taxing Internet sales is a complicated issue. The trick is to balance genuine fairness and reasonable regulations while respecting federalism and encouraging interstate competition.

— Paul Gessing is president of New Mexico's Rio Grande Foundation, which promotes limited government, economic freedom and individual responsibility. Contact him at: [email protected]