- - Thursday, August 28, 2014

ANALYSIS/OPINION:

For the past several years, a group of senators has been desperate to enact a tax on Internet sales, attempting a number of strategies that have, thankfully, failed. Senate Majority Leader Harry Reid’s latest scheme is to play a game of political chicken: refuse to pass the widely popular Permanent Internet Tax-Freedom Act (PITA) until after the November midterms, when the lame-duck Senate could attach the sales tax, called the Marketplace Fairness Act (MFA) without concerns about an upcoming election.

PITA would make permanent the existing ban that prohibits states from taxing Internet access. This is a highly important piece of legislation, and has historically been nearly unanimously supported. PITA is important for all Americans, and it needs to be voted up or down based on its own merits, rather than be used as a bargaining chip to pass an unpopular tax.

The MFA on its own is problematic for a number of reasons, and using the Permanent Internet Tax-Freedom Act as leverage is bad for taxpayers, retailers and state sovereignty — and it would not help brick-and-mortar shops, as supporters claim. It may put them in a more competitive position with regard to small online retailers, but shoppers will continue to prefer large online retailers such as Amazon, whose low prices are no longer dependent on avoiding sales tax.

Supporters of MFA still argue that it is unfair for online retailers to forgo the collection of sales tax and pass those savings on to consumers. Since the bill’s supporters have engaged in the “fairness” argument, who would get a “fair deal” under the Marketplace Fairness Act?

Not taxpayers. States argue that allowing them to tax online purchases would open the door to new revenue, and that could be used to expand and improve government services. In reality, states would share in the total of $8 billion to $12 billion in new revenue, much of which would be eaten up by creating and implementing the required compliance software.

Not small online retailers. Most supporters of the bill have pointed to large companies such as Amazon as the face of the Internet sales-tax loophole. But in reality, the MFA really wouldn’t hurt Amazon at this point, because it is just too large and successful. It is small online retailers who will really feel the sting when it comes to implementing an online sales tax. Consider this: While states would be required to provide retailers with software to comply with their state’s sales tax, no simplified, federal program will be required. This means that small businesses could be dealing with up to 45 different sales-tax compliance programs. That alone is complicated enough to force small businesses to shut down, not to mention the loss of income they would face.

Not states. States are meant to be laboratories for innovation, testing ground for different policies that allow citizens to choose which government or taxing structure they prefer. This is why we see stark differences in income, property and sales taxes across state borders. By allowing a state to spread its particular policy beyond its borders and into other states, this system is undermined, and states lose the incentive to remain competitive with their neighbors in terms of providing the best place to live for their citizens.

Before leaving for the August recess, Mr. Reid announced that rather than attaching MFA to PITA before the November election, he will offer a separate, very short extension of the Internet access tax ban. Perhaps this move was based on the understanding that the two bills are in sharp contradiction to each other and, therefore, should be dealt with separately. More likely, however, the Senate is looking forward to the lame-duck session, where it can threaten to defeat a permanent ban on Internet access taxes in order to pass the MFA, all without the threat of a midterm election. Don’t be fooled by this quiet delay in the MFA fight. This is a dangerous move for taxpayers and retailers, because it leaves legislators with a terrible choice to make: tax the Internet or tax Internet sales. This is not a decision that any legislator should have to make, let alone a lame-duck legislator.

The Senate needs to stop playing political games and shuffling its feet when it comes to Internet access. It needs to follow the House’s lead and pass the Permanent Internet Tax-Freedom Act when senators return from recess in September. Perhaps then the Senate can stop wasting the few remaining legislative days it has left and pass crucial bills before lawmakers hit the campaign trail later this fall.

Mary Kate Hopkins is a policy analyst at Americans for Prosperity.

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