By: D.J. Bettencourt – May 2013
By any measure, the “Market Place Fairness Act” currently under consideration by Congress is terrible policy. However, its negative effect on New Hampshire and small business is particularly pronounced.
The proposed legislation is an internet sales tax that seeks to force every on-line retailer with annual sales exceeding $1 million to collect a sales tax on their customers based upon the sales tax rate where that customer resides. This would even apply to businesses operating in states with no sales tax. In short, it expands the taxing power of state and local authorities to squeeze revenues from businesses and individuals that would ordinarily be well outside of their jurisdiction.
How does the law work? Normally, sales taxes are collected and remitted by retailers at the “point of sale.” When retailers at “The Loop” make a sale, they collect the sales taxes that are due to Massachusetts and the City of Methuen and send them to the proper revenue agency. Under this scenario, it is immaterial whether the particular buyer is a resident of New York City (8.875% sales tax) or Salem, New Hampshire (0% sales tax) because the tax is collected at the “point of sale” and thus is the same for everyone. Under the proposed law, the “point of sale principle” is discarded and retailers are forced to track the place from which an online buyer has made a purchase, calculate that shopper’s applicable state and local sales taxes based on wherever they reside, collect the tax, and then remit them to the applicable revenue agency.
Currently, nothing prevents states from taxing online sales within their state. However, few states elect to do so because it would encourage companies to locate in less-taxing states. Instead, the Market Place Fairness Act allows states to punish citizens for shopping at out of state businesses. Worse, the law invites double taxation through interstate compacts which could allow sales to be taxed in both the shopper and business’s jurisdiction. While this is currently forbidden by the Internet Tax Freedom Act of 1998, that protection expires next year.
The act is particularly offensive to states like New Hampshire who value its sales tax free environment. Grant Bosse of the Josiah Bartlett Center for Public Policy captured its effect on New Hampshire perfectly, “Taxing online sales wouldn’t cost New Hampshire residents much in the short term. We don’t have a sales tax, so we wouldn’t have to pay it. But it would erode our ability to attract online retailers, at least those that hope to grow to a million in annual sales.”
This threat to small business is hardly inconsequential. Often internet sales are the only thing keeping a significant number of small businesses afloat. Internet sales have weathered the disastrous Obama economy remarkably well. In fact, they are one of the few economic bright spots that are currently creating jobs. Hurting the ability of small businesses to innovate and make money online by locating internet operations in tax friendly states will only result in more businesses closing their doors. The only winner under this scheme is the ever growing appetite of government.
New Hampshire’s two United States Senators, Kelly Ayotte and Jeanne Shaheen deserve great credit for opposing the Market Place Fairness Act and fighting for an exemption for states with no sales tax. Ayotte has astutely pointed out that the proposed law would add expensive administrative costs by forcing small businesses to track the place from which an online shopper has made a purchase, calculate the applicable state and local sales tax, collect that tax, and then remit them to the proper revenue agency. It is an unfunded mandate in its worst form.
So why, given the strong arguments in opposition, does passage in the Senate appear likely? The primary selling point is that the act pressures states to streamline and simplify their tax codes. This provision was intended to lure small businesses into supporting the legislation by promising to make it easier for them to comply with the business tax code, thus bringing them some much needed certainly and stability in their day to day operations.
However, the Act completely fails in that promise because it still requires businesses to keep track of 9,600 widely diverse and constantly changing taxing jurisdictions. Thus, any benefit of the law is vastly outweighed by the additional hassle and administrative costs.
In the end, the Market Place Fairness Act is a stark reminder to always beware any proposed law with “Fairness” in its title.
D.J. Bettencourt served as a State Representative in the New Hampshire House of Representatives from 2005 to 2012 and was the House Majority Leader for the 2011-2012 legislative term. He currently works as a special education academic assistant and is the Volunteer Coordinator at the Salem Animal Rescue League.