Opinion

Online taxation to crush competition

Zack Christenson Research Fellow, American Consumer Institute
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On Monday, the Senate voted to take up the Marketplace Fairness Act, the bill that would force Internet retailers to begin collecting sales tax on purchases made online. Currently, Internet retailers have no obligation to collect sales tax, as the process would be a burdensome and arduous task, on both the businesses and consumers. The Senate could take a full vote later this week.

The bill’s name is a misnomer, because it’s anything but fair. As I explained in a previous blog post for the American Consumer Institute, the bill would allow sales taxes to be collected by states from companies that are outside of their jurisdiction.

So for example, Internet retailers found in California would have to abide by the tax jurisdictions in New York, Virginia, Illinois and all other states, as well as all city and municipal tax jurisdictions. In all, it amounts to 9,646 different tax codes that Internet retailers would have to adhere to.

This obviously puts small businesses that operate on the Internet at a major disadvantage. Brick and mortar stores only have one, maybe two, tax codes to deal with. And Internet giants, like Amazon, have teams of lawyers, accountants and consultants to help guide it through the maze. Small businesses don’t have that luxury. They struggle as it is against larger retailers.

The result of this legislation would potentially put small and medium sized business out of business or forced these businesses to raise their prices to cover costs. Either way, consumers lose — they’ll either have to pay higher prices at the small businesses, or be faced with less choice as the small businesses are forced to shut down.

If you had any question over who would benefit and who would hurt if the bill were enacted, just take a look at who’s lining up on either side of the bill.

In favor of the bill are the Internet and brick and mortar giants—names like Amazon, Best Buy and Wal-Mart. These big businesses have lined up teams of lobbyists to push this bill through. If they can take out any competition before it gets too big, they stand to increase their bottom line by cutting out competition. This gives less choice to consumers, which in turn gives potential to raise prices with no check from the competition that doesn’t exist anymore because they were driven out of business.

It also can’t be a coincidence that Amazon sells tools for small businesses to attempt to comply with the regulatory demands that come with abiding by the 9,646 tax jurisdictions. There are others who have been around Washington longer, but I’m not sure I’ve seen such an agreement between Big Government interests and Big Business interests. Both will harm the consumer.

On the other side, you have companies like eBay, who help small businesses to connect with their customers. They’ve been opposed to the bill from the beginning, even sending out a system-wide email to their members warning what could happen to small businesses and consumer choice should this bill pass.

As eBay points out in their letter, the bill would put single employee stores and Amazon in the same category—without taking into consideration the vast resources at Amazon’s disposal, which allows them to jump through administrative and regulatory hoops.

Another glaring example of the corruption inherent in this bill is an anecdote from a Reuters story—how one man who runs a fly-fishing business will be forced to move his business from eBay to Amazon, as Amazon could run his fulfillment and tax compliance.

I don’t know if you can find a better example of a business using big government to take out a rival.

If government was really concerned with leveling the playing field for Internet retailers and brick and mortar establishments, there are plenty of other solutions. There’s origin-based sourcing, which allows states to collect sales tax on where the Internet retailer is headquartered—the same way a brick and mortar establishment is taxed. Bottom line is this bill is bad for consumers and bad for small businesses – which means that it is also bad for the economy.

Congress should look at alternatives to this poorly conceived bill.

Zack Christenson writes on digital tech issues for the American Consumer Institute Center for Citizen Research, a nonprofit think tank.  For more information, visit www.theamericanconsumer.org.