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The Marketplace Fairness Act would subject retailers to sales tax audits from 50 different states and tax laws of nearly 10,000 local tax authorities. Proponents of this bill claim that this levels the playing field between internet merchants, such as Ebay or Amazon with brick and mortar retailers like Walmart or Best Buy. Critics point out that it only boosts the tax bill for America’s consumers and allows state governments to tax businesses not within their jurisdiction. But the hidden story here is how taxing the internet will get people to start using bitcoin more and the dollar less.
If the government pushes through the Marketplace Fairness Act, a bill that gives states the authority to collect taxes from online sales then we should expect the grey market to grow – substantially. The term grey market is the trade of a commodity through a distribution channel that while the good is legal itself, the transactions are unofficial, unauthorized or unintended by the original manufacturer. It’s often used as a way to buy or sell legal goods, under the table to avoid taxation.
Silk Road is an online black market website that allows black and grey market goods to be sold online, roughly 70% being illegal drugs, but, if this bill passes, this website may see a rise in legal goods being sold and purchased. Buyers and sellers conduct all transactions using Bitcoins, a crypto-currency that provides anonymity. The other 30% accounts for Fake ID’s, books and erotica, however, if products sold on the internet are subject to taxation people may begin to start looking elsewhere for non-taxable goods. Items such as electronics, office supplies, jewelry, and clothing may begin to be more commonly sold over Silk Road. The more burden of taxation that occurs, the more likely individuals will begin supplementing regular income with this more lucrative grey/black market.
The tobacco industry is a good example of a grey market. Businesses may choose to purchase cigarettes from a different country and import them illegally for sale at their convenience store. The incentive to do this is high because it’s cheaper for the business to purchase cigarettes in countries that aren’t subject to the same type of taxation as U.S. companies. In another example of grey markets, The Supreme Court had a hearing in late 2012 about a case regarding Supap Kirtsaeng v. John Wiley & Sons, Inc where an individual had purchased textbooks from outside the United States from online retailers and reselling them in the United States for higher cost. The case is about the unauthorized resale of copyrighted works bought outside the US but in reality it’s just a reflection of grey market activity. If this legislation passes, expect what’s going on in the real world to increase in the online world, also as technology increases, the chances of getting caught increases, so also expect more uses of Bitcoin as a means to securely purchase goods online.
Speculation has already begun whether PayPal will begin accepting Bitcoin as payment. The current legislation would only give authority to states to collect sales tax from internet sales but it doesn’t stop people from visiting a website that’s selling goods –call up the physical store, place the order and send them payment via PayPal…directly…without sales tax included. The concept of anonymous transactions via Bitcoin will make the value of it go up tenfold if PayPal decides they’ll accept it as a payment.
The avenue of Silk Road or PayPal for grey market transactions will be increasingly popular if the Marketplace Fairness Act passes. Popular items such as cell phones, tablets, computers, pharmaceuticals, tobacco products, textbooks and even stock market securities would be more commonly found and taxing the internet will provide people with a strong incentive to start using Silk Road instead of paying with taxable dollars. Bitcoin isn’t taxable quite yet, it’s untraceable, and purchases online via Silk Road won’t be subject to the same tax code. Taxing internet sales will encourage businesses to start cheating the system more and selling some of their goods on the grey market—tax free. Under the table transactions will always occur but it can be limited, if the government is limited, taxes are limited and incentives to cheat are limited. This bill does the exact opposite.
If the dollar is taxed online and bitcoin isn’t, which one will you use to shop?