Senate Republicans dropped the ball on the Internet tax mandate

Glenn Jacobs Co-Founder, The Tennessee Liberty Alliance
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On Monday, the Senate passed a measure that would subject Internet commerce to state sales taxes for the first time. The misleadingly titled “Marketplace Fairness Act” enjoyed bipartisan support with 22 Republican senators voting “yea” on the bill.

Currently, states cannot force Internet retailers outside of their borders to collect sales tax on their behalf. The Marketplace Fairness Act would change that.

Republicans who favor an Internet sales tax claim that, since “use tax” laws — which require residents to pay sales tax on goods that they buy out of state — are already on the books, this is not a new tax. While this might technically be true, the fact is that most people are ignorant about use taxes or simply ignore them, and these taxes are rarely enforced.

The Marketplace Fairness Act transfers this tax obligation to Internet retailers, forcing them to become tax collectors for the 45 states that have sales taxes. The result will be a nightmare for small Internet retailers. For instance, Justin Krauss estimates that this legislation will cost his small company, Garage Flooring, $40,000 in its first year, and $4,000 a year thereafter. While large companies are easily able to absorb costs such as these, it’s a different matter for small businesses that operate with paper-thin profit margins.

Proponents of the bill claim that compliance costs will be mitigated because participating states will have to purchase and provide tax software to any Internet retailer who wants it. However, as eBay, the Internet auction giant, points out:

Software is a not a panacea. There is no software solution to protect a small business from audits and litigation by distant states. For example, under this bill, a small business in Arkansas can be summoned to a California court for audit proceedings. This creates costs and risks that jeopardize a small business’ ability to grow using the Internet.

No wonder Internet retailer Online Stores believes that the Marketplace Fairness Act will force 9,000 companies out of business, costing over 200,000 jobs. With unemployment remaining stubbornly high, this is the last thing the stagnant American economy needs.

It’s also the last thing that the American middle class needs. Whether this is a new tax or not is really beside the point. If the Marketplace Fairness Act becomes law, it will be the first time that the real impact of this tax will be felt. Millions of Americans will see a rise in the cost of their Internet purchases. Because sales taxes are regressive, the middle class will feel the weight of the additional cost most heavily. With so many folks struggling to make ends meet, why burden them with yet another tax?

State officials are eyeing the tens of millions of tax dollars that they claim an Internet sales tax would produce, citing studies that forecast up to $23 billion a year in additional revenue. However, a 2010 study by George Mason adjunct scholar Jeffrey A. Eisenach and Brookings Institution senior fellow Robert E. Litan put the figure at only $4 to $5 billion a year. The experiences of states that have imposed “Amazon taxes” on large Internet retailers — agreements imposing sales taxes in return for new facilities in their state — back up Eisenach and Litan. Internet sales taxes in these states have only produced a fraction of the revenue that was forecast.

Thus, according to George Mason University’s Nita Ghei, “the distortions and costs of this tax far outweigh the value of revenues going to state and local governments.”

Republicans claim that the best way to stimulate the economy is to cut taxes and government spending, and let the market work its magic. Those Republican senators who voted in favor of the Marketplace Fairness Act voted against the free market and failed to live up to their limited-government rhetoric.

If this Internet tax mandate passes the House and is signed into law, not only will it effectively raise taxes on millions of Americans, it will destroy jobs and further burden an economy that is already creaking along under the weight of too much government.

That so many Democrats are for this is outrageous enough — but if the GOP can’t even stand against more government and taxes, what is the point, exactly, of even having a Republican Party?

Glenn Jacobs is an entertainer and liberty activist. He is the co-founder of the Tennessee Liberty Alliance, a free-market educational organization.