Imagine trying to start an innovative, online small business in Virginia only to find out that the federal government mandates that you must become the tax collector for 9,600 jurisdictions — 9,599 of which are not where your business is located — and, if you get it wrong, you could be audited by the likes of California, New York or any of the other thousands of tax jurisdictions. If that makes no sense to you, it's because for two centuries we have had a legal system that said entrepreneurial small-business owners should not be required to enforce laws outside of their home jurisdiction.
For example, merchants in Virginia are not required to collect the Maryland sales tax for a product when a Maryland resident crosses the state line and purchases an item in Virginia. As governor, I understood that I didn't have a right to extend Virginia's taxing authority outside of our borders. Current law treats all retailers equally. If a business has a physical presence in a state, it must collect and remit sales taxes to that state. If it doesn't have that physical presence, then it doesn't have that obligation.
The deceptively named Marketplace Fairness Act, H.R. 684, currently being considered in Washington would change these principles. It would create a new requirement for online retailers to charge taxes based on where a consumer lives or where he intends to use the product purchased. That's like requiring any retailer to "card" customers, find out where they live, and then charge them that sales tax at the checkout counter. What a nightmare — for everyone involved.
Make no mistake, the funds collected under this bill would be more than $23 billion in new taxes out of the pockets of America's hardworking taxpayers and families and a burden on small businesses that are granted only a $1 million per year exemption in gross sales — not profits. In the retail world, that's not just a small business, it's a very small business — smaller than the annual budgets of some U.S. Senate offices. The national, well-known "big box" stores, which are in all or in most states, have sales of more than $1 million every week.
At a time when even the Obama administration is now acknowledging that its mandates on small businesses are hurting the economy, why would the government add more? Because the very big businesses with a presence in many big states wish to squelch a minuscule amount of competition from small businesses. That's why.
As a governor and U.S. senator, I fought against the avaricious federal, state and local tax commissars who wanted to compel small out-of-state retailers to collect and remit sales and use taxes. Over the years, the opposition to a new Internet tax was bipartisan and informed by technology-friendly senators on both sides of the aisle. Senators who have worked to protect Internet commerce have included Ron Wyden, Oregon Democrat, who is now joined by Republicans Ted Cruz of Texas, Kelly Ayotte of New Hampshire and Marco Rubio of Florida.
Nine of the 10 largest online retailers already pay taxes because they have a physical presence in the state. Instead of killing the future online retailers in the cradle and losing all that future tax revenue and jobs from new businesses — along with the choice and price competition they offer to consumers — Congress should be listening to bipartisan tech leaders and advocating policies that encourage these small businesses to grow and prosper. When entrepreneurs add a physical presence to their operations, they will provide new revenue to local, state and federal government coffers where that physical presence is located — just like it works today.
Keeping the Internet free of unfair, discriminatory taxation policies that would impede its future growth as a source of commerce, education and information is as important today as it was decades ago. A guiding principle when dealing with the booming tech industry was always "first, do no harm." The so-called Marketplace Fairness Act simply does not pass this test. The U.S. House of Representatives should give this bill serious scrutiny to make sure there is a level playing field for all businesses, whether they transact business by mail-order catalogs, by phone, online or in a shopping mall.
George Allen, a Republican, is a former Virginia governor and former member of the U.S. Senate.
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