This past Monday the Senate voted overwhelmingly in favor of taking up debate and amendment on the Marketplace Fairness Act, a bill that would force online retailers to collect Internet sales tax. A final Senate vote is imminent, and it seems that the bill will pass.

Proponents of the bill and Internet sales tax generally argue that traditional brick-and-mortar retailers are at a major competitive disadvantage against online retailers who do not have to charge sales tax. Proponents also point to ongoing economic woes in the United States, especially at the state and local level. If online retailers did all collect Internet sales tax, approximately 22 to 24 billion dollars in revenue would be generated in state and local taxes. The Obama administration supports the bill, and the overall argument is simple: states and localities need money, badly, and this is a way to get it.

Opponents of the bill include not only small online businesses but lone big holdout, eBay. Other notable opponents include states like New Hampshire which do not collect sales tax; if the bill passes, New Hampshire and other states like it will have to create an Internet sales tax collection system out of whole cloth. A brick-and-mortar business in New Hampshire would then have a distinct advantage over an online business due to the lack of sales tax. Furthermore, because there are in excess of 9,000 different state and local sales tax schemes that even the smallest retailer would have to master, opponents argue that the bookkeeping trouble alone will break some small online businesses.

To assuage some of these concerns the bill exempts smaller online retailers whose out of state business amounts to less than $1 million annually. It also requires that state governments provide free software to Internet businesses to help them calculate their specific sales tax. (Of course this leaves the remaining thousands of local tax systems.) Also, there is no provision for dealing with the difficulties of reporting and filing, and this seems like it may be the worst part of it in the end.

Other critics argue from an economic standpoint that if sales tax goes up the result can actually be that overall tax income goes down. This is because people spend less, companies go bust, fewer people start businesses, and people lose their jobs. Whether this will be the actual outcome of this kind of Internet sales tax bill remains to be seen, but it does seem fairly certain that the bill will place a substantial burden on online businesses, and one that the smallest businesses might not be able to shoulder. Ironically, these are often simply brick-and-mortar outfits with a small Internet store.

And let’s not forget the elephant in the room: that whole Boston Tea Party thing (not the modern Tea Party). Does this bill mean that Internet business will be subject to taxation without representation in different states as they pay sales tax there? What about when a business in Las Vegas has to pay sales tax in Trenton where is consumes no services and has no voice in governance?

About the author

Karla Lant

Karla Lant is an Adjunct Professor for Northern Arizona University and a freelance writer. A former trial attorney in major felony criminal defense, her areas of legal expertise include forensic science, intellectual property, biotechnology, and constitutional law. Lant also focuses on tech trends, science and education in her work.

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