U.S. Senate inching closer to voting on Internet sales tax

Senate Majority leader Harry Reid introduced a motion Thursday to support the Marketplace Fairness Act (S.336/H.R.684), which could be voted on anytime this week. The legislation permits states the power to collect online sales taxes from retailers outside their borders, a controversial issue for both the consumer and the retailer in this economy.

Although online retailers are already compelled to collect taxes from customers in their own states, companies don’t usually collect taxes when sending items to purchasers in other states. Companies have to collect the sales tax from out-of-state consumers if they have a physical presence in the customer’s state. Essentially, states have to rely on customers to self-report, but it’s rarely the case.

If the legislation is passed and signed by President Obama then it would be a big win for the traditional bricks-and-mortar stores, like Walmart, Costco, Best Buy and antiquated mom and pop shops.

Proponents make the case that the bill would make the marketplace fairer. According to the Marketplace Fairness Act website, it would also help states facing significant budget shortfalls.

“Although some suggest these States have a ‘spending problem’ rather than a ‘revenue problem,’ it is important to recognize that these States have already been reducing their spending levels year-over-year and increasing collection and enforcement efforts based upon their existing sales and use tax laws,” the website states.

“However, a State can only enforce these laws within its own borders unless (or until) Congress recognizes the significant advances made by “man and his ingenuity with machines” over the last 46 years. Simply put, without the Marketplace Fairness Act, our States are unable to require remote retailers to collect the existing sales or use tax already approved by that state’s residents.”

Art Laffer, Chairman of Laffer Associates and former economic adviser to President Ronald Reagan, told CNBC on Thursday that he favors the legislation and believes it would be a terrific opportunity for states to lower their income taxes.

“This Internet stuff that’s tax-free, it’s just not fair competition,” said Laffer, who appeared to lose credibility when he debated Peter Schiff prior to the economic collapse a few years ago. “We should have a level playing feel and keep all tax revenue statically revenue neutral. It’s just like the income tax. You have a flat tax, all income at one rate and that’s exactly what you should do with sales in the states.”

Opponents of the legislation say it’s just another state government tax grab in order to grow government. Heritage legal expert David Addington explained in a recent blog post it doesn’t surprise him that state governments search for out-of-state businesses that are lucrative and “politically easy targets for tax legislation.”

Essentially, the think-tank says consumers and Internet companies would be hurt the most, while state politicians and state governments would benefit the most. The group puts it as simple as this: “Less money in the pockets of people, more money for big government.”

The Securities Industry and Financial Markets Association, a Wall Street trade group, issued a statement that said an online sales tax could cripple the financial services industry. The organization stated Congress hasn’t sufficiently researched the topic.

“The bill could lead to unexpected costs being passed on to consumers of financial services, including sales taxes on services or state-level stock transaction taxes,” the group said in a statement.

New Hampshire Republican Senator Kelly Ayotte called the bill “disastrous” and accused her colleagues of “trying to muscle” the online sales taxes, according to a statement. She alleged that they’re trying to pass the bill before senators actually realize how it would hurt businesses in their respect states.

“Supporters of this online sales tax bill are trying to muscle it through before senators find out how disastrous it would be for businesses in their states,” Ayotte said. “I will fight this power grab every step of the way to protect small online businesses in New Hampshire and across the nation.”

The legislation has bipartisan support: 86 members of congress, 29 governors (Chris Christie, Rick Snyder, Jan Brewer, Jerry Brown) and various trade associations, businesses and groups (Amazon, Gap, JCPenny, PetSmart).

There are 17 organizations opposed to the measure, including eBay, Campaign for Liberty, Americans for Prosperity, National Taxpayers Union and Heritage. Those who are neutral or undecided are AT&T, Council on State Taxation, National Federation of Independent Business, National Cable and Telecommunications Association and Verizon.

Perhaps any sort of tax reform should be, as Robert Wenzel of Economic Policy Journal puts it, tax cutting.

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