Saturday, May 11, 2013

A License to Kill

It’s quite possible that you, like most Americans, have not been paying attention to the shenanigans that went on in the Senate this week with the passage of an Internet sales tax, laughably named The Marketplace Fairness Act. I guess a more accurate name like The Internet Sales Tax and Small Online Vendor Unemployment Act would not garner too many votes in either congressional chamber or from either political party. The fact is this bill is a license to kill small Internet e-businesses.

Naming new laws is definitely an art form. No matter how perverse the motives of a new law, it always comes with a sugary name that makes a somnambulistic electorate wonder why anyone would object to a law bearing such a well-meaning name. If the truth be known, I believe Congress subcontracts bill-naming to Comedy Central and Saturday Night Live. The Patient Protection and Affordable Care Act comes to mind.

I’m not shy about calling things by their right name. The Internet sales tax law is another attempt by states to create an additional revenue source. Since the housing bust, property values cratered and the property tax trough dried up for county governments. Unemployment and reduced consumption have reduced the flow of the state income and sales tax revenue stream.

You’d think that state, county, and local governments would say, “Golly gee, we’re not bringing in the bucks we used to. Let’s cut services to get spending in line with the tax haul.” Nawh! That’s what you and I have to do when we run out of money before we run out of month. Government bureaucrats look for more things to tax. And they’ve been salivating over the Internet golden goose since the thing became the new medium for commerce in the early 1990s.

An office supply company, Quill Corporation, was the first case to beat back a state’s attempt to turn a foreign company (i.e. one with no physical presence in the state) into a collection agency. Quill licensed software that allowed customers to check its inventory and order stuff. The North Dakota State Tax Commissioner notified Quill that it was to collect taxes on goods shipped to customers in its state, even though Quill had no presence there and sold by catalogs and telephones from warehouses outside the state. I don’t know the exact words Quill used with the ND Tax Commish but it was something like, “Take a hike. I don’t get paid to do your job. If you want the taxes, you collect them.” The hard part in sales tax collections, of course, is knowing who the customers are and Quill’s sure weren’t raising their hands.

The case went to the Supreme Court and North Dakota lost in a 1992 ruling.

The case set a precedent that states have no jurisdiction over businesses not located in their state. Not to be put off by a mere technicality, state and county tax commissioners around the country have been looking ever since for ways to waddle up to the tax revenue trough as more businesses abandon bricks and sticks for online business models. In 2012, year-over-year e-commerce sales in this country grew 16% to $226 billion, most of which is untaxed. Ten percent of sales now occur online. It would be easier for a drunk to pass up a drink than a tax commissioner to pass up this tempting target.

Under our constitution, however, states can’t pass laws that affect other states. So states that want to raid another state’s merchants have to make it happen at the federal level with the help of their congressional delegation in Washington. To that end, Governors began whining that it was unfair competition when out-of-state online merchants could sell at lower prices because purchases were tax-free. They whined that their bricks and sticks merchants were being used as showrooms by shoppers who unfairly made their purchases online. Baloney! This debate has nothing to do with fairness. It’s about taxes.

Both Republicans and Democrats have been quite willing to help lighten the pockets of people who buy stuff on the Internet. Did I say lighten? How about $23 billion lighter? That’s the estimated new sales taxes that could be pickpocketed from online consumers and transferred into state and county tax coffers. Think about how many new state and county employees could be hired and paid not to work!

The ultimate con in this shell game is the argument for leveling the playing field – i.e. online sellers aren’t paying their fair share of taxes. Isn’t that the same con Obama used last fall to raise tax rates on the rich even though very little tax revenue would be raised? Wyoming Republican Senator Mike Enzi, who introduced the Internet theft bill, defends it by saying "Right now, out-of-state online catalog retailers are operating and they're selling within different states, but they're not having to follow the same laws as other businesses and that . . . is collecting the sales tax on purchases."

If you check Enzi’s bio, you find that he, like most in Congress, has never worked for a living because he’s been in government since age 30. When members of Congress can pass laws affecting business, but they’ve never been in business themselves and struggled with the complexities of making business work, they can say some truly stupid things. And Enzi’s statement is one of them.

Let’s parse it.

Enzi’s argument is that a business located outside of, say, Wyoming that sells to Wyoming residents (and other states) ought to be collecting sales taxes from Wyoming purchases because Wyoming brick and sticks merchants have to collect Wyoming sales taxes. In other words, since A suffers B ought also to suffer. One obvious response to that argument is to get rid of Wyoming sales taxes. Then in-state and out-of-state merchants are on the same footing. Five states have no sales taxes and they aren’t in receivership. Rather than finding more things to tax, our elected officials ought to be working to reduce the number of things that are taxed.

Enzi and his Senate colleagues might then argue (as they have) that the states do so much that benefits their state’s economy (roads, schools, utilities, etc.) and out-of-state merchants are getting a free ride. That dog won’t hunt, however, because merchants that have no in-state presence don’t use state services.

The hole in Enzi’s argument is that it doesn’t level the playing field as he claims. It discriminates against merchants located in other states.

Suppose a Montana company sells something to a Wyoming resident via catalog or online purchase. Montana has no sales tax, but notwithstanding that, Enzi says the Montana merchant should collect a sales tax and send it to the Wyoming tax commissioner.

What happens if the same Wyoming resident is in Montana and makes the same purchase? Nothing. The Montana merchant doesn’t say, “Let me see your driver’s. Oops! You have to pay sales tax and I have to mail it to your tax commish.” In fact, that doesn’t happen in any state, including those with a sales tax. A Wyoming resident who buys something in Colorado pays Colorado sales tax to the Colorado tax authority.

The most damning argument against Enzi’s bill, however, is that it’s a license to kill all but the largest online merchants. This is what happens when voters send business bush leaguers like Enzi to Washington to make laws regulating business.

Let’s say an online merchant is located in Indiana and sells to residents of all 50 states. (Yes, there are only 50, not 58 as Obama believes.)  How many tax transmittals is the merchant required to make? If you said 50 (or 58) you’d be wrong. There are 9,646 different sales tax jurisdictions in the US, each of which can require the Indiana merchant to collect taxes on their behalf and send the collections to them. In the back room monkeyshines that we’ve come to expect from Harry Reid, Reid further added: "any tribal organization" – i.e. Indian nation – which I’ve learned number "566 federally recognized tribes and Alaska Native Corporations." And, oh gee, I left out District of Columbia, Puerto Rico, Guam, American Samoa, the Virgin Islands, the Marianas Islands, and any other protectorates, territories, and US possessions. All can tax online sales.

If that sounds like a nightmare in the making, wait! There’s more. Each of the 10,000 tax authorities has different tax rules for taxing. Buckle your seat belt and sail the Internet and you’ll learn that Texas taxes small pretzels but not large ones. Iowa taxes Halloween pumpkins but not the edible kind. Rhode Island taxes soft drinks but not bottled water. It taxes clothing but not fur clothing, dialysis (unless it’s done at home), eye glasses and contacts (unless there is a doctor’s prescription). Products taxed in one state aren’t taxed in another. States have tax-free shopping days – on different days, of course.

If my mythical Indiana merchant’s annual revenues are $1 million or more, every one of the 10,000 taxing authorities has the right to audit the books to confirm they’re getting their pound of flesh. What sort of tax records do you suppose that merchant will have to keep to satisfy 10,000 bureaucrats and their arcane tax rules? What would compliance cost in terms of additional people and time? Our unsuspecting Indiana merchant thought America was the land of opportunity where anybody with a good idea could turn it into a web-based business and now there are 10,000 hands in the company’s cash register and books. And don’t forget ObamaCare. It will force the owner to buy insurance for every employee (if more than 50 are employed for more than 30 hours per week.) Little did the merchant know that his business is just a sideline. The real purpose of his venture is to generate and collect taxes. What a country!

How about the in-state bricks and sticks merchants? What kind of compliance costs do they incur? Almost none. And what kind of records do they have to keep? Very few. The bricks and sticks guys collect sales taxes and remit them only to their state even if every sale they make is to an out of state resident! They don’t have to deal with 10,000 paws in their till or their books. Now, what was that “level the playing field” line again?

Once the way is clear to collect online sales taxes across state lines, what other taxes do you believe state commissioners will dream up? How about taxes on transactions that aren’t traditional sales like out-of-state medical treatments, 401k contributions and stock sales, expert services delivered in the form of recommendations? Any business with an axe to grind because it is losing sales to out-of-state competitors will use their state or county government as a battering ram to “level the playing field.” Colorado state legislators could care less, for example, about the howls any new tax they dream up causes among New Mexico’s merchants. Residents of New Mexico don’t vote for Colorado legislators.

There’s nothing to prevent any of the 10,000 tax bureaucrats from disputing an out-of-state merchant’s tax collections, filing liens on the merchant’s property, and suing him in a friendly home court. That forces the merchant to suffer considerable legal expense or submit to tax blackmail.

You don’t think that would happen? I’ve had a number of run-ins with state taxing authorities because of business ventures in which I’m a partner. Each partner owes taxes in every state in which the venture does business. Believe me, these state tax Neanderthals will spend a thousand dollars to collect five. It isn’t their money they’re spending; they are only judged on collections.

How soon we forget that only as long as Washington bureaucrats kept their hands off of the Internet was it able to grow into the commercial growth engine it is today. The Internet Tax Freedom Act of 1998 was a federal law preventing states from taxing Internet use or access. While the feds could have passed a law allowing states to tax Internet sales, they avoided doing so until now. What changed?

Shocking as it may seem, companies like Amazon – once a fierce opponent of state tax avarice – has now grown to a point where it has a presence in many states and therefore must pay taxes in those states. Predictably, as its tax compliance complexity and cost grew, Amazon developed technology to facilitate compliance. Amazon’s business model has morphed from online bookseller to online technology broker and multi-product merchant. It sells access to its powerful online presence to small merchants who can’t afford to duplicate it. Instead they buy access from Amazon for a fee and a commission on their sales.

Amazon and other online merchants can afford to deal with the byzantine compliance rules of 10,000 sales tax rules. So they’ve switched from opponents to advocates of sales taxes. Smaller merchants who are too large to be exempt under the $1 million rule but are too small to be able to build the compliance infrastructure will have to buy compliance from, you guessed it, Amazon. Wow! Amazon now has another new product to sell.

And who loses thanks to our government’s meddling in Internet transactions? The small merchant which can’t afford compliance even if bought from Amazon – unless Amazon decides to offer a multi-tiered pricing structure that allows even the tiniest merchant to buy compliance. I’m betting they won’t do that because it’s too much of a hassle for the revenue Amazon would earn.

The Senate bill passed late Monday in a 69-27 vote, which means it had a lot of Republican support. Its fate in the House is less certain, and that’s where this monstrosity has to be killed.

One of the 27 votes the Internet tax bill didn’t get was that of the newly-elected, independent-thinking Republican Senator Ted Cruz of Texas. He saw this job-killing bill as a regulatory Godzilla.  “So, how is this fair?” Cruz said. “After all, brick and mortar stores aren’t subjected to all these rules. And, how is it fair for a Texas business to collect taxes to support California Gov. Jerry Brown’s big spending?...Make no mistake: Big business supports this bill because it will drive smaller competitors off the Internet and out of business.”

I think he’s right.

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