Latest Internet sales tax proposal: From bad to worse

Steve DelBianco

When congressional allies of major retailers began advocating that a complicated nationwide Internet sales tax be imposed, it was a bad idea that Congress rightly rejected. Now they’ve come back with a modified version of their Marketplace Fairness Act (MFA) – but doubling down on a bad idea doesn’t make it better; it’s still bad policy. 

The argument against the Internet sales tax is simple: we shouldn’t empower tax collectors to try to force small businesses to collect sales tax for what could be 10,000 local jurisdictions, and file returns with 46 states. It would drown small businesses in red tape and leave them open to tax auditors from nearly every state.


Now, in an effort to reignite the debate, Rep. Jason Chaffetz (R-Utah) is floating an amended MFA that would only complicate matters further. First, it would still require small businesses to collect taxes for 10,000 local jurisdictions and file returns in 46 states. But here’s a twist: it would be a bonanza for so-called Certified Software Providers (CSPs), a half-dozen companies that stand to profit by serving as a clearinghouse for tax collections. 

It’s no wonder these CSPs have pushed for this legislation: one estimates they will rake-in over a billion dollars by extracting 5 to 8 percent of the taxes they process. 

It’s useful to remember what was the impetus for the legislation: to collect taxes. Not only does the Chaffetz bill include all of the onerous and complicated provisions that would be an accounting and auditing nightmare for small businesses, but states would actually collect fewer taxes after the CSPs take their cut off the top. 

Ultimately, the Chaffetz proposal doesn’t solve the most pressing issues: it doesn’t protect small businesses from an auditing nightmare nor does it force states to simplify their sales tax rules.  Just like the fatally flawed MFA, this bill allows each state to have its own definitions for taxable products, sales price, rules, and filing forms. That creates a minefield of complexity where businesses will inevitably make mistakes that will be pounced upon state tax auditors. 

Collecting sales tax on e-commerce makes sense. But it has to be done in a way that doesn’t destroy small businesses, thwart competition, and reduce consumer choice. 

This is ultimately a David vs. Goliath story. Nearly all of the nation’s largest e-tailers already developed sales-tax collection systems for every state because they have stores there. They have systems in place to deal with the taxes they must collect based on the fact they have a physical presence in those states. But it’s an altogether different story for small businesses. Many have only a few employees based in one location. And they simply don’t have the capability to comply with a myriad of tax laws across nearly every state in the country. 

Congress has to keep trying until it can come up with the right answer. But it’s clear that creating a nightmare for hundreds of thousands of American small businesses just so six “Certified Software Providers” can reap billions is not the answer.  

House Judiciary Chairman Bob Goodlatte (R-Va.), however, may have an answer that works.  His draft legislation would let every business collect and file sales tax based on the rates and rules of where they are based – instead of where the customer lives.  Goodlatte’s plan creates true parity between online, catalog, and brick-and-mortar stores.  States would route tax collections to where customers reside, so Goodlatte’s plan would help pay for local services, too. 

It’s rare for America to emulate European policy moves, but this is one case where we should definitely learn from European mistakes.  The EU learned a valuable lesson from a decade of forcing remote sellers to file Value Added Tax (VAT) wherever the customer resides, finding significant VAT burdens when selling across borders among 28 member states. The EU’s new Digital Single Market proposal turns away from the MFA approach and endorses Goodlatte’s plan: "Instead of having to declare and pay VAT to each individual Member State where their customers are based, businesses would be able to make a single declaration and payment in their own Member State." 

Chaffetz, big retailers and CSPs are making their last pitch to save MFA in this Congress.   But as Europe’s experience shows, they’re headed in the wrong direction. 

DelBianco is executive director of NetChoice, a trade association of e-commerce businesses and online consumers all of whom share the goal of promoting convenience, choice, and commerce on the net.

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