Senate Passes Internet Sales Tax. Yipp yipp yipp yipp yahoo. But there is nothing fair about the Marketplace Fairness Act.

Yes, there is a problem to be solved. Brick-and-mortar merchants have trouble competing with internet merchants on price. That’s bad enough. But they are also at an additional disadvantage if the internet merchant is out of state and does not collect the sales tax that the in-state brick-and-mortar merchant has to collect from the buyer. The U.S. Supreme Court in 1992 ruled that states cannot tax businesses that aren’t physically within their boundaries; such taxes would “regulate” (that is, interfere with) interstate commerce, which is a prerogative of the federal government.

Once again, the same old itch, the same old scratch — “somebody must do something.” OK, what?

Option 1.
The internet sales tax could be based on the address of the BUYER.

The problem with option 1 is the incredible bookkeeping burden on the merchants. The seller must at all times be up to date with the constantly changing sales tax rates and lists of taxable and non-taxable items in literally tens of thousands of local taxing authorities across the country. Plus, they are liable for making remittances to each of those tens of thousands of local taxing authorities, and to be audited by officials from each of those tens of thousands of local taxing authorities, in which they have no representation and from which they derive no services or benefits.

The additional problem with option 1 is the incredible bookkeeping burden on the local taxing authorities. They are liable to having to audit millions of merchants across the country to make sure they are charging the right sales tax and remitting the right amounts.

But you can see how politicians love this option. They can claim not only “marketplace fairness” but also the creation of literally hundreds of thousands of new jobs, heck, an entire new industry of internet sales tax collections:

1. Armies of software engineers to create and maintain the database of sales tax rates in all the tens of thousands of taxing authorities across the country,

2. Armies of researchers and coders to collect the ever-changing data for this database, as local taxing authorities keep changing their rates and lists of taxable and non-taxable items,

3. Armies of salesmen and instructors to demonstrate, sell and teach this database to the millions of merchants across the country,

4. An entirely new clearing house employing armies of clerks to handle the collections and remittances from the millions of merchants to the tens of thousands of local taxing authorities, and

5. Armies of bookkeepers, accountants, auditors and lawyers in each of the tens of thousands of local taxing authorities to make sure that all the millions of merchants across the country are charging the right sales tax and remitting the right amounts — plus their counterparts in the private sector to defend the merchants…

It is a windfall for the buyer’s state because its residents are paying a tax on goods they did NOT buy in-state.

It is a loss to the seller’s state, unless they have the gall to tax the sale twice, once for the buyer’s state and again for the seller’s state.

It is a loss to the customers, (1) as prices will necessarily have to rise to cover the cost of all these new armies of useless paper pushers, and (2) there will be no restraint on states to keep them from raising their sales tax rates, and (3) in fact would encourage states to do so, especially if they find that most of their customers are out of state — there is nothing more delicious than to have others pay your taxes…

Option 2.
The internet sales tax could be based on the address of the SELLER.

In the physical world, the seller couldn’t care less where the BUYER lives; the sales tax depends on the point of sale, which is the location of the SELLER. This means that the seller only has to track the sales track rate in exactly one jurisdiction — his own and only his own.

The problem with option 2 is that residents in state A will pay taxes to state B in which they have no representation and from which they derive no services or benefits. Ever hear of “taxation without representation”?

But option 2 is the only one that keeps costs low for everybody — buyer, seller, and the local taxing authority. There is no need for (1) anyone to create and maintain the database of ever-changing sales tax rates across the country, (2) merchants to lease this database, (3) a central clearing house to handle remittances to all the right taxing authorities, and (4) local taxing authorities to audit all the millions of merchants across the country to make sure they are charging the right sales tax and remitting the right amounts.

Option 2 is also the only one that has any hope of fostering competition between the states, to see which ones can attract with their favorable business tax policies more merchants to establish a physical presence in their state, and attract more customers from across the country with their low sales tax rates. This is a win-win for everybody.

Option 3.
The simplest and hardest of all, for a politician. DO NOTHING.

Obey the Supreme Court. Let the private sector solve the problem. For the merchants, this would be a textbook case of “in you can’t beat them, join them.” Go on the internet. Play by the same rules. Many already have both a physical presence and an internet presence; many are finding that their internet presence drives local commerce; so this is hardly radical.

Option 4.
Guess which option Congress is NOT considering?

It’s the Fair Tax, that is, a national sales tax. If we did have a national sales tax to replace the income tax, payroll taxes and everything else, then it would not matter where and how you buy stuff, because everything would already be handled by your own state, and it would be the state that would forward to the feds their share of the collections. The reduced processing costs alone would lead to considerable reductions in the sales tax rates.

Guess which option Congress is proposing… the worst possible one; 1.

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