The Internet Sales Tax – A Terrible Proposal

“Hey, how much tax needs to be collected for this pair of pants being sold that’s going to New York?”

“How much does it cost?”


“OK, if it’s going to one of the five boroughs of New York City, no tax. If it’s going to Nassau County, 4%. If it’s going to Suffolk County, 4.625%.”

“No, not New York — to Newark, New Jersey.”

“Oh, New Jersey doesn’t tax general clothing sales, unless it’s fur.”

The Internet sales tax, should it become law, is going to be that bad.

The Senate (thanks to the help of 22 Republican Senators) just passed the “Marketplace Fairness Act,” a lovely Orwellian name for an act which permits states to collect sales tax when someone orders a product which is delivered in a state where the seller does not have a physical presence.

Currently, if a store has a warehouse or other physical presence in a state (such as Sears in New York, for example), sales tax is collected when you order a product from that retailer’s online website. Technically, when you purchase a product from a seller outside of your state, you are required to pay sales tax (more specifically, a “use tax“) on the sale instead of the seller. This makes sense, since the my state (the People’s Republic of New York) has no jurisdiction over a seller located in, for example, Montana, but they do have jurisdiction over me.

The argument goes, since I am using the product in New York, I owe “use tax” on it. However, since the product is not being used in Montana, no tax should be collected from the state of Montana. While this post won’t address the constitutional issue in-depth, but it would seem Congress does have the authority to pass such legislation. Even if it were constitutional doesn’t mean it’s wise.

If this legislation is signed into law, then any seller who grosses $1 million in sales (or revenues) in a year could will be required to collect sales taxes. But amount they must collect will not be uniform. They will have to collect for each and every state, county, and city where their products are shipped. The total number is close to 10,000 taxing authorities. With state governments hurting for revenue, does anyone really think a state will decide not to extend its sales tax power to internet sales delivered within their jurisdiction?

Some argue that collecting these sales taxes will give states a fiscal windfall. Oklahoma, for example, estimates that it will be able to collect $200 million in sales tax. Of course, any positive revenue from sales tax being collected assumes that retail sales aren’t a zero-sum game. For example, it assumes that sales won’t decrease because of the increased taxation. As we know, when things start to get taxed, people find ways to avoid paying taxes. It’s human nature. So any revenue estimates should really be taken with a grain of salt.

Some pundits argue that collecting these sales taxes will let states cut real estate or income taxes. If you believe that one, I have a bridge to sell you.

Don’t worry, Governor Cuomo — I’ll collect sales tax on that sale.

Some are wondering what all the fuss about? Isn’t this just about making things more “fair?”

Whenever the government starts to talk about fairness — run.

The Marketplace Fairness Act is estimated to cost small business $360,000 on gross sales of $30 million. That doesn’t sound like much, but it’s the profit margin of a majority of small businesses. This means jobs will be lost, and/or small businesses will close — simply because their business is less profitable.

The current wording of the law exempts businesses that have less than $1 million in gross sales. That’s actually not a lot of money, given low margins in many retail businesses. The bigger problem is enforcement. Who is going to audit the sales of the business that is right on the edge of the $1 million revenue mark? The IRS? The state taxing authority where the business is located? The state taxing authority where the bulk of the sales are being sent? All three? A new agency?

Another problem: Middle class taxpayers will be hurt. Retailers who have billions in sales, such as the “big box retailers” such as Wal-Mart and even online stores such as Amazon, can afford to absorb the compliance costs. The “poor,” if you will, meaning the businesses with less than $1 million in gross sales, are exempt. The “middle class” of business in between these two extremes will suffer the most.

That’s really how all of these regulations operate. Whether it’s Sarbanes-Oxley, Dodd-Frank, Obamacare, or the Marketplace UnFairness Act, the big boys can absorb the costs, the “poor” are exempt, and the middle class suffer.

Sound familiar?

Finally, it is awfully interesting the owner of is a company called FedTax, which provides a way for businesses to “easily” collect sales tax for various jurisdictions.

How serendipitous that they want to sell such a service perfectly tailored for this piece of legislation, right?

You know what’s not so funny? The fact that much of the Marketplace Fairness Act bill itself is basically copied verbatim from‘s business model’s website.

Cronyism in taxation. What a surprise. Welcome to America.