FreedomWorks Foundation Content

The Unfair Effects of the Marketplace Fairness Act

On Friday, March 22, the United States Senate conducted a “vote-a-rama,” featuring an unlimited number of amendments to the federal budget being brought to the floor for a vote. One amendment that was passed by the Senate was Wyoming Senator Michael Enzi’s amendment that sought to “establish a deficit-neutral reserve fund to ensure marketplace fairness by allowing States to enforce State and local use tax laws.” Although this amendment has no force of law, it served as a way to gauge support of possible legislation that would allow for the creation of an internet sales tax, allowing individual states to collect sales taxes on any online purchases, regardless of which state an online retailer is located. Senator Enzi has proposed a bill that would accomplish this goal, with companion legislation proposed by Rep. Steve Womack (R-AR). This legislation has been titled the “Marketplace Fairness Act of 2013,” but if implemented the impact of the act would be anything but fair.

Under current federal laws, individual states have the power to collect sales taxes on online purchases made within their states if online retailers have a physical presence in those states (such as a retail store or distribution center), however states are unable to collect sales taxes from retailers who do not have a physical presence within their state. Some states, such as Wisconsin, still impose a sales tax on online purchases made through out-of-state retailers; however they request that individuals report these purchases when completing their state income taxes, a process that most citizens ignore. The “Marketplace Fairness Act” would make it easier for states to acquire these taxes, requiring retailers to pay the sales taxes directly to the states, rather than relying on citizens to self-report and pay uncollected sales taxes with their annual income tax filings.

One reason to oppose this expansion of the internet sales tax is because it is supported by big business retailers who view the expansion as an opportunity to undercut their smaller online competitors. For years, big business retailers like Wal-Mart have been lobbying in favor of expanding the online sales tax as a way to increase costs faced by smaller competitors, and, a company that originally opposed marketplace fairness legislation, has recently joined Wal-Mart in support of the “Marketplace Fairness Act.” As the Washington Examiner’s Timothy Carney describes this situation, “big business is lobbying for bigger government, which would hurt Mom and Pop.”

Corporate lobbying’s impact on marketplace fairness legislation is so easy to find in this situation it’s not even funny. As I noted earlier, the “Marketplace Fairness Act of 2013” is being sponsored in the House of Representatives by Congressman Steve Womack, a Republican from Arkansas’ third congressional district. The third congressional district in Arkansas is composed of several counties in the Northwestern part of the state. Among these counties is Benton County with its county seat of Bentonville, Arkansas, well known for being the corporate home for Wal-Mart. Supporting marketplace fairness legislation (as Rep. Womack is in this case) to benefit big businesses like Wal-Mart is nothing more than corporate welfare, with the government unnecessarily involving itself in the private sector to choose winners and losers.

Another problem with marketplace fairness legislation is that imposing an online sales tax on retailers as the effect of forcing online retailers to finance programs outside of their own state. Sales taxes are generally imposed by states to finance local projects that benefit both individuals and businesses in local communities, yet out-of-state retailers who would not benefit from these programs would still be required to finance them through sales taxes under the “Marketplace Fairness Act of 2013,” as Logan Albright noted in a FreedomWorks issue analysis on marketplace fairness last month. Why should retailers be forced to finance programs in other states over programs in their own states? The answer is that they shouldn’t, and the Marketplace Fairness Act would create an unnecessary burden on retailers to do so.

In requiring online retailers to pay sales taxes that would benefit out-of-state programs, retailers would be forced to navigate different state sales tax rates around the country, a significant burden as compared to traditional brick and mortar stores who only have to deal with a single sales tax rate (or no sales taxes at all) depending on where their physical store is located. If imposed on retailers, marketplace fairness legislation could burden retailers with the task of being compliant with up to 9,600 different taxing jurisdictions. While traditional retailers claim this requirement creates more fairness in the marketplace, the reality is that the requirement does the opposite, imposing an unfair burden on smaller online retailers who would have a more difficult time complying with different sales tax rates from around the United States.

In total, only 24 U.S. Senators voted against unfair online sales tax regulations during the U.S. Senate’s vote-a-rama on Friday – nineteen Republicans and five Democrats. The negative effects that would be felt by online businesses as a result of the “Marketplace Fairness Act” are not limited to those described here, and the possibility of the act becoming law is a possibility that should worry consumers across the United States.