The proposed bill is anything but 'fair,' and it is both economically destructive and contrary to the logic of federalism.

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Should states be empowered to begin taxing businesses far beyond their individual borders? 

Should online businesses be forced to assume the role of tax collector for states in which they don’t even maintain a physical presence? 

Believe it or not, there’s an effort underway to allow just that.  Along the way, it would increase online sales taxes and expand state revenue authority over out-of-state businesses.  And it’s gaining momentum. 

Regrettably, even some otherwise conservative figures have joined the effort, under the false pretense of “fairness” or “leveling the playing field” between Internet commerce and brick-and-mortar sales.  But Americans mustn’t be fooled.  In this period of protracted economic malaise, online commerce remains a rare bright spot, and new sales and use tax burdens would hit small businesses – which create most new jobs in the U.S. – particularly hard. 

The proposed federal legislation at issue goes by the name “Marketplace Fairness Act.”  Innocuous titles often conceal destructive ends, and this case is no different.  The proposed bill is anything but “fair,” and it is both economically destructive and contrary to the logic of federalism. 

Under current law, state taxation authority extends only to businesses physically situated within its borders. 

And for good reason, dating back to our nation’s inception. 

In order to eliminate commercial warfare between states, which occurred all too often under our original Articles of Confederation, Article I, Section 8 of the Constitution expressly authorizes Congress to “regulate Commerce with foreign Nations, and among the several states.”  Under the Articles of Confederation, state taxes and duties hindered and suppressed interstate commerce, so our Founding Fathers included those provisions to alleviate that structural flaw. 

As a natural corollary, the Supreme Court recognized long ago that the Commerce Clause “’by its own force’ prohibits certain state actions that interfere with interstate commerce.”  Then, in an 8-1 decision, the Supreme Court affirmed in Quill v. North Dakota (1992) that state attempts to tax businesses with no substantive physical presence within their borders constituted such illegal interference.  Unless Congress later decided for some reason to affirmatively grant states the authority, that is. 

Fast forward to today, as politicians in various states seek new sources of revenue to feed their limitless spending appetites, and some businesses see a crony capitalist opportunity to kneecap online retailers. 

Enter the Marketplace Fairness Act. 

Far from introducing “marketplace fairness,” it would do the opposite.  To understand how, consider the way sales taxes currently work.  A cashier in one state obviously doesn’t inquire into the buyer’s state of residence at the point of sale, which makes perfect sense.  The seller collects tax on the basis of its physical location, not the purchaser’s.  If a California resident walks into a shop in Florida, why should the shop’s cashier be forced to ascertain the buyer’s state of residence and its myriad tax regulations?  It’s difficult enough to master the retailer’s own state tax laws, let alone the nearly 10,000 state and local tax regimes across the country. 

Under the Marketplace Fairness Act, however, online businesses would suddenly be forced to do just that – figure out a way to navigate the spaghetti bowl of tax laws throughout the nation based upon the domicile of its customers.  Since brick-and-mortar businesses would not face the new burden, it’s easy to see the discriminatory nature of this proposed bill. 

The proposed law also undermines the concept of federalism.  Since states ideally constitute laboratories of democracy, businesses decide where to set up shop on the basis of economic calculation, including relative hospitality of local tax laws.  Not only would the Act undermine that ability, it would reduce the incentive for states and municipalities to maintain lower tax rates versus others. 

Additionally, it’s incorrect to claim that current law unfairly burdens brick-and-mortar businesses vis-à-vis their online competitors.  After all, the brick-and-mortar businesses use local resources such as physical infrastructure, utility and police and fire departments that distant counterparts do not. 

Moreover, online sales still account for only 7% of all retail spending, which further exposes the Marketplace Fairness Act as a money grab for state politicians, not an equalization for brick-and-mortar sellers.  States also already possess the legal authority to require individual residents to pay use taxes on out-of-state sales, even if compliance remains low. 

Fortunately, the American public remains cool toward the proposed legislation.  By more than a 2-to-1 margin, voters oppose the concept of allowing enforcement agents from one state to collect taxes from online retailers in other states.  As illustrated by ObamaCare, however, popular opinion doesn’t always guarantee against unwise legislation. 

Hopefully, Congress will listen to both popular opinion and logic, and reject the pernicious Marketplace Fairness Act.