The Lame Duck Threat Online Consumers and Small Businesses Should Fear

Heritage Action Internet Sales Tax

It’s 2014, and American consumers are increasingly making purchases online. This trend shows no signs of changing. But Senate Majority Leader Harry Reid (D-NV) and his ideological allies are scheming to throw a wrench in the works. Online shoppers who enjoy the benefits of tax free online shopping may no longer be able to do that if Sen. Reid gets his way. Small online businesses are currently taxed on sales only where they have a physical presence and therefore political representation. If the Internet sales tax becomes law, they will no longer have that freedom, which is a violation of federalism.

Reid announced in September that he will do whatever it takes to pass an Internet sales tax bill, the misleadingly named the Marketplace Fairness Act (MFA), after the midterm election.  The bill would place burdensome regulations on small online businesses and would entail a massive expansion of state taxing authority. Because only 35 percent of Americans support Internet sales tax legislation, he plans to attach it to a very popular ban on Internet use taxes known as the Internet Tax Freedom Act (ITFA).

In place since 1998, ITFA is a moratorium on any new discriminatory state and local Internet use taxes. The moratorium has been reauthorized four times, most recently in 2007. The House unanimously passed a permanent extension of the moratorium by voice vote earlier this year, but the Senate refused, instead extending it only until December 11, 2014, pushing it off conveniently to the middle of lame duck.

The so-called Marketplace Fairness Act would allow states to require out of state online retailers to collect and remit their sales tax, even if said retailers have no physical presence in their state. So a small online business owner in New Hampshire or Delaware, two of five states with no sales tax, would be required to collect and remit sales tax for their consumers who live in any of the 45 states (or the District of Columbia) that have sales tax.

The nightmare doesn’t end there. Small online businesses could face thousands of audits from state and local tax jurisdictions because they would have to navigate the policies of some 10,000 jurisdictions and 46 state tax authorities where their customers live. Brick and mortar stores only have to collect sales tax where they have a physical location — forcing small online businesses to comply with MFA regulations is certainly not fair.

For consumers, the Marketplace Fairness Act would mean the end of tax free online shopping. It would significantly increase the cost of buying goods on the Internet, all for the sake of states that want more revenue to grow government. It would reduce choice for online consumers as well, because while the bill would not harm major online retailers, small online competitors would be driven out. In fact, some of the most vocal proponents of this type of bill are major retailers who want to smother the next generation of start-ups.

Passing a terrible bill by holding a great law hostage during a lame duck session is a sneaky tactic. The American people deserve more honesty from their elected leadership. Politicians know that the lame duck session provides them the most political cover because its when voters can hold them least accountable.

Washington’s goal should be to encourage prosperity and innovation, especially for small businesses. Revenue-hungry states eager to grow their bureaucracies want an Internet sales tax. Major retailers who have a physical presence in almost every state anyway — and the financial resources to hire expensive lawyers and accountants to navigate the complexities of thousands of tax jurisdictions — want an Internet sales tax. But for consumers getting ready to do their Christmas shopping and small online businesses trying to flourish, the Internet sales tax is a terrible idea.

Katherine Rosario is the Communications Deputy for Heritage Action for America. Follow her on Twitter: @KathMaryRosario

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