Friday, April 26, 2013

The Senate's Stealth Sales Tax Increase: "The Marketplace Fairness Act"

Conventional wisdom says the politically divided Senate can’t agree on anything. The conventional wisdom is wrong. Conventional wisdom says Republicans will not vote for a tax increase. The conventional wisdom is wrong, at last with the Senate. The Senate voted 74-20 on Tuesday to consider the Marketplace Fairness Act, otherwise known as “stick it to small merchants and Americans who buy through the internet and mail order companies.” A final vote is scheduled for May 6. President Obama, who has yet to meet a tax he doesn’t like, has promised to sign the bill if it reaches his desk. Those of us who live in states with sales taxes, which are most of us, have to pay a sales tax in the state on taxable purchases, whether it be a soda or luxury car. The law has been clear for decades if we buy an item from an out of state seller. If they have a physical presence in the state, then they have to collect the state’s sales tax on purchases sent to the state, but they cannot be forced to collect the sales tax if they don’t do business in the state. For example, Massachusetts has a 6.25% state sales tax, but neighboring New Hampshire has no sales tax. New Hampshire residents purchasing an item in New Hampshire would pay no sales tax on it, but they would pay a sales tax if they cross the stateline to purchase it in Massachusetts. Conversely, a Massachusetts resident would pay no sales tax by crossing the line to purchase it in New Hampshire. If though the New Hampshire company does business in Massachusetts such as by operating a store in Massachusetts or delivering the product itself to Massachusetts, it is supposed to collect the tax from the Massachusetts resident. The store would not know the residency of the consumer who’s physically in the store purchasing, but if they order online with a Massachusetts address, or have it delivered to Massachusetts, then the merchant would have to collect the tax. The Supreme Court’s jurisprudence on the Commerce Clause is also clear that since Congress is the ultimate arbiter on the Commerce Clause it could change this rule and require shippers to collect the sales tax for the state the item is being shipped to. Companies did a thriving mail order business in consumer electronics, such as the once fabled 47th Street Photo in Manhattan, by shipping cameras out of state and thus charging no sales tax. The out-of-state buyer would pay neither a New York sales tax nor a sales tax in the state of residency. The rise of the internet and greatly increased the amount of non-taxable, interstate purchases. The savings to consumers are substantial, an estimated $22-24 billion annually. The states are salivating at getting their hands on these revenues. These figures though are suspect. The Census Bureau estimated e-commerce retail sales of $225 billion in 2012, up 16% from 2011. Since very few combined state and local taxes equal %10, the “lost” sales tax revenue of $22-24 billion seems high. The savings by a Massachusetts resident on a $1,000 purchase in New Hampshire would be $62.50. If a mail order company, such as LL Bean in Maine, absorbs the shipping costs, then the savings to the consumer are greater. Connecticut residents living near the Massachusetts line will often cross the stateline to but their gas in Massachusetts because of a substantial difference in the state’s gas taxes. They might also drive up to New Hampshire, as one Massachusetts state senator did, to reap substantial savings on booze from the New Hampshire state Liquor Stores. Brick and mortar retailers, including the big box chains such as Wal-Mart, Target, and Best Buy complain they lose sales to consumers who will check the products in their sores, and then order online without paying a sales tax. They claim it is unfair to them. It’s no coincidence that the House Bill is sponsored by the erstwhile conservative, Arkansas Republican Congressman Steve Womack. Never forget that Wal-Mart is based in Bentonville, Arkansas. Small merchants would have to deal with the complexities of trying to collect sales taxes for over 9,000 jurisdictions with no uniformity in tax rates. The die was cast last year when agreed to collect the sales tax for California, Pennsylvania, and Texas this year, and Connecticut and Massachusetts next year. wishes to build large distributional warehouses in these states, thereby acquiring a physical presence in the states. It now supports passage of the Marketplace Unfairness to Consumers Act., leaving E-Bay as the major retail holdout. The Bill in its current form would exempt small retailers with less than $1 million in interstate sales from its coverage. E-Bay, representing its scores of small retailers, is trying to get the figure lifted to $10 million. The Senate will pass the bill, leaving its fate up to the House. No indication has come out of the House, especially from Speaker Boehner, of how the House will act on the Bill. The Representatives more closely represent the grass roots of America than the Senators. Perhaps they will listen to the consumers on this week off, and not the lobbyists for the Big Box stores and the governors and mayors who have squandered existing tax revenues, but claim the bill will help preserve Ma and Pa on Man Street. Conventional wisdom also says "Politics makes for strange bedfellows." I understand Democrats and republicans acting bi-partisan on measures, but Wal-Mart and mayors who are trying to keep Wal-Mart out of their cities? One question remains: Why would Republicans vote to increase taxes that will fuel the growth of government?

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