US Congress faces Internet tax Catch-22
- Summary:
- By Senate Majority Leader Harry Reid tying the Internet Tax Freedom Act to the Marketplace Fairness Act, lawmakers now face a dilemma about whether to side with business or consumers.
I stumbled across a Wall Street Journal blog this morning that brought to my attention an issue that seems to be slipping under the radar of a lot of the mainstream and trade press – one regarding internet taxation in the United States. The current catch-22 facing lawmakers in Congress is one that could cause a hell of a lot of problems for either the hundreds of millions of internet users across North America, or the tens of thousands of online retailers that sell goods across the United States.
At present there are two internet tax movements happening in the US. The first involves the Internet Tax Freedom Act, which essentially bans states from taxing consumers for access to their broadband connection. It is a temporary ban that has been renewed a number of times since it was first introduced in 1998 and is popular given that it makes it significantly cheaper for every resident across the United States to get access to the internet. However, there have been moves to make it permanent in recent weeks before it expires in November.
The second movement involves the Marketplace Fairness Act, which is a controversial bill that has been thrown out in the past and seeks to force online retailers to pay a sales tax on goods bought out of state. At present, retailers largely only have to pay a sales tax where they have a physical presence. But a passing of this bill would mean that an online retailer, anyone from the likes of Amazon to an SMB setting up shop at home with a laptop, would have to figure out how to distribute sales taxes to states across the US, if it has a buyer there.
The Marketplace Fairness Act is a tricky one and it's difficult to get a consensus on what is the right thing to do, for obvious reasons. On the one hand local governments complain that online retailers aren't contributing, and are actually denting, tax revenues and they still need money to fix potholes in roads, etc. Equally, bricks and mortar businesses are complaining that consumers are turning their backs on shopping in-store for goods over a certain price, because a hefty sales tax can boost the price of a purchase by hundreds of dollars. Why would you buy it in store if its significantly cheaper online?
So at present the lack of a sales tax for online retailers is good news for consumers – one reason to keep the Marketplace Fairness Act at bay. However, and more importantly, the complexities of paying taxes to 50+ territories (more on why the '+' later) if you're an online retailer would be extremely challenging. Also, how will local governments even monitor this? The internet isn't easy to track and such a bill may be unworkable, some have argued.
Catch-22
So what's the big deal? Push the Internet Tax Freedom Act through and ditch the Marketplace Fairness Act if it doesn't work, right? Not possible thanks to one sly Senate Majority Leader, Harry Reid, who has invoked some rule that has allowed him to bring directly to the floor a new bill that essentially ties the two together. They both relate to tax, so why not right? Senators now face the choice of passing the bill, making both tax-free access for consumers and tax-heavy regulation for online sellers a reality, or voting against it, which would mean that the Internet Freedom Act could expire in November and states could start introducing levies for broadband access to make up their revenues.Related Stories
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The Retail Industry Leaders Association in the US has expressed its support for the two bills – now called the Marketplace and Internet Tax Fairness Act. Bill Hughes, executive VP for Government Affairs, issued a statement that said that Congress has a “unique opportunity” to level the playing field for those that operate offline. Hughes said:
Retailers support keeping Internet access tax free while closing the online loophole that essentially subsidizes online-only retailers against their brick and mortar competitors. It's time for the government to take its thumb off the scale and give all retailers a fair shot to compete in the free market.
Congress has a unique opportunity to support continued growth of the digital economy while giving local businesses a boost by levelling the playing field and removing artificial advantages in the market.
Given the overwhelming bipartisan vote on the Marketplace Fairness Act in the Senate and near-universal support in the House for ITFA, it seems obvious that these issues can and should be resolved together this year.
However, the general reaction on Twitter to the news hasn't been a positive one:
@SenDeanHeller stand with the majority of Americans and oppose the Internet sales tax in the Senate! #NoNetTax pic.twitter.com/G6UMhEo9Zp
— No Internet Tax (@NoInternetTax) July 19, 2014
Democrats want to tax internet sales,tax internet access and ban UBER. BAck to the 1970s.
— Grover Norquist (@GroverNorquist) July 18, 2014
The internet sales tax is back from the dead! Don't let politicians screw Millennials yet again. http://t.co/bO1qNYpJAI #WarOnYouth
— GenOpp (@GenOpp) July 18, 2014
Overwhelming majority of NC residents oppose the Internet Sales Tax. Sign this petition NOW! http://t.co/nJTZE7u1R8
— GenOppNC (@GenOppNC) July 16, 2014
Equally, the WSJ raises a good point in that Mr. Reid's actions mean that even small online businesses will have to answer to not only 50 state tax auditors, but to a whole host of other territories. Their article states:
In a back room he rewrote the bill's definition of "state" to ensure that small Web merchants would have to answer to 50 state tax auditors and to hundreds of Indian tribes. The legislation also empowered the District of Columbia, Puerto Rico, Guam, American Samoa, the Virgin and Marianas Islands "and any other territory or possession" of the U.S. to force distant e-sellers to collect taxes.
At the time, not even the bill's principal sponsor, Sen. Mike Enzi (R., Wyo.), was sure how many governments would be free to audit online sellers, or if Web merchants would have to respond to inquiries from America's thousands of municipalities.
It is likely that decisions will be made over the next couple of weeks before Congress times-out for its August break.
Verdict
As a Brit, I've always been baffled by the sales tax on my trips to the US – simply from a consumer perspective. How is anyone meant to know how much they are actually spending before they get to the till?!
But anyway, this seems like a dangerous move to me. As I've written before, I do think we need to figure out ways to level the playing field for traditional businesses where we can (see my story on pricing controls for black cabs in London), but I do not think the answer is implementing some legislation that is
basically going to be unworkable.As we've seen already in the UK, taxing companies that operate online is incredibly difficult. And we are largely a homogenous regulatory state. How is a single state in the US going to collect taxes from thousands of online retailers scattered across North America? They just aren't. Even if they'd like to. Yes, they could probably target the Amazons and the eBays of the online world, but beyond that its just too complicated to make work, in my opinion. Also, even if all the online retailers were incredibly honest and figured out how to pay all the territories it owed tax to, with variable levels of tax and various geographies – how easy is this for an SMB to do? Ir's a recipe for disaster.
I don't know what the answer is, but my gut tells me that this isn't it. By tying a popular bill that is simple and essential for the digital economy to continue to grow (taxing access to the internet – really?!) to one that is complicated and could hinder the digital economy is dangerous. Let's hope Congress sees sense and doesn't take this further.