Despite overwhelming support among senators, the Senate has delayed its vote on the Marketplace Fairness Act until May.
State governments, which could use a revenue infusion, and brick-and-mortar stores, which would prefer that their online competitors’ prices didn’t automatically undercut their own, clearly support the Act. Heck, even internet retailer extraordinaire Amazon supports the Act.
But there is a small coalition that opposes the Act. That coalition includes, among others, some internet retailers like eBay (which spammed me with its anti-MFA email) and some Republican politicians like Rand Paul.
Rand Paul feels so strongly about the Marketplace Fairness Act that, in a Washington Times editorial, he tries to rebrand it as the “Internet Tax Mandate.” The Act is wrong, he asserts, because “it is nothing more than a huge tax increase on the American people.”
Except that Senator Paul is wrong. And he’s wrong in at least two ways: first, the Marketplace Fairness Tax does not impose any tax at all. Moreover, if enacted, it will not result in a higher tax burden, unless a state decides to increase its sales tax rate. And, if a state decides to increase its sales tax rate, there’s nothing the federal government can do to prevent it (though the language of the bill expressly disclaims any intention of encouraging states to increase sales or use tax).
Read My Lips: No New Taxes
In 1992, the Supreme Court decided Quill Corp. v. North Dakota. Quill, an office supplies vendor, had no physical presence in North Dakota. It made its sales from catalogs, and sent goods through the mail. The Supreme Court held that, without some sort of physical presence, North Dakota didn’t have jurisdiction to require Quill to collect and remit sales tax. It also held that Congress had the power “to decide whether, when, and to what extent the States may burden interstate mail order concerns with a duty to collect use taxes.”
Twenty-one years after Quill, the Marketplace Fairness Act would do just that: permit states that had adopted certain simplified sales tax laws to require out-of-state retailers to collect and remit sales tax, even if they have no physical presence in the state. The Act would not force states to collect sales taxes from internet retailers; it would just give them the ability to do so.
A Tax Increase?
But most, if not all, states with sales taxes would probably start requiring internet retailers to collect sales taxes, right? So how is this not a tax increase?
It’s not a tax increase because purchasers already owe taxes on purchases they make. Every state with a sales tax also has a use tax. Use tax is basically the difference between the amount of sales tax due in your state on a purchase and the amount you owe. So, for example, if you live in Chicago (combined sales tax rate: 9.25%), but you drive down to Gary, IN (sales tax rate: 7%) to buy a $500 laptop, you’ll pay $35 in Indiana sales tax. Had you bought it in Chicago, you would have owed $46.25. As a result, you owe Illinois use tax of $11.25.[fn] And if you buy that same laptop from Amazon (assuming Amazon sells sofas), Amazon will currently not collect any sales tax. But you will owe $46.25 in use tax.
If the Marketplace Fairness Act passes and Illinois requires Amazon to collect sales tax, you will pay $46.25 in sales tax on your laptop purchase. But your use tax liability will drop to $0.
A Nation of Tax Scofflaws
That said, chances are that you will, in fact, pay more in taxes. Use tax is notoriously hard to collect–only about 1.6% of taxpayers actually pay their use tax. Though it is not perfect, compliance with the sales tax is undoubtedly much higher. (Why? Retailers are presumably more sophisticated. Also, it’s easier and more cost-effective for state revenue departments to audit a handful of retailers, each of which collects and remits a lot of sales tax, than a lot of individual taxpayers, each of whom owes a little use tax.
But shifting from use to sales tax does not increase the net sales tax liability. It merely improves the states’ ability to collect the taxes their residents owe.
[fn] (Assuming, of course, that you bring the laptop back to Chicago to use it. You wouldn’t owe taxes if you left it in Gary, even if you drove down to Gary every time you wanted to check your email. Which seems a kind of burdensome way to avoid the use tax, which is kind of the point.)