A Half-Baked Marketplace Fairness Act | Commentary

Many continue to call for Congress to pass legislation empowering States to require remote sellers to collect sales tax on their behalf. They say such legislation is necessary to provide fairness between brick and mortar retailers and online sellers. Let me be clear: Overstock.com supports a fair federal solution to prevent a patchwork of legal standards, not to mention computer systems, from making online retailing a virtual nightmare. Unfortunately, the Marketplace Fairness Act is not that solution.

Early this Congress, the Senate passed the MFA — but did so without the benefit of hearings or a Committee markup. Ramrodding it through in this fashion, the Senate leadership lost the chance to fix the bill. To use a metaphor, the MFA wasn’t fully baked.

Here are Overstock’s key concerns with the MFA. First, the MFA lacks significant detail about how states, remote sellers and certified software providers will interact. There are far too many unsettled questions that will take years to litigate to any level of certainty.

Second, the eleventh hour addition of a “non-preemption” section (S 743, Sec. 6) perpetuates the ability of States to ignore the MFA and continue to pursue their own patchwork of tax laws, such as the constitutionally suspect affiliate and economic nexus laws passed in Illinois and California and the privacy invading reporting laws in Colorado and Oklahoma. For example, States may eliminate the small business exemption or ignore the MFA’s simplification requirements. A chief aim of the legislation should be uniformity. The MFA’s failure to preempt hobbles its utility and effect. Under the MFA, thousands of taxing jurisdictions each with authority to conduct expensive and time consuming audits of remote sellers, may persist in their present complex and disparate rules.

Third, the MFA places significant financial burdens on remote sellers. An example of this is found in the credit card transaction fees almost all remote sellers must pay on credit card transactions — including any sales tax transaction. Since the MFA imposes tax collection obligations on remote sellers without requiring reimbursement of these tax-collection related transaction fees, the aggregate unreimbursed amounts could amount to millions of dollars. This is doubly unfair because remote sellers, by definition, have no presence in the taxing state and, unlike their bricks and mortar counterparts, derive no significant benefit from these states. To live up to its ideal of “fairness,” the MFA should require States to allow remote sellers to keep a small portion of the taxes collected to cover credit card transaction fees and similar costs incurred for being drafted into doing a State’s tax collection work. The amount should never be so much as to become a profit center but rather fair reimbursement for reasonable costs incurred.

Fourth, while the MFA requires States to provide remote sellers with free tax collection software, the better choice is for remote sellers to choose software that they know will integrate with their existing computer systems. Overstock sells more than one million products — coding each of those products to all the states’ varied software products will require thousands of hours of employee time to properly implement.

Had the Senate and MFA proponents followed regular procedure, these and other problems could have been solved last year. Similarly, there is now another short-sighted procedural power-play: MFA proponents are working to attach the MFA to the Internet Tax Freedom Act. ITFA has broad-based support because it prevents States from imposing taxes on Internet access. ITFA sunsets Nov. 1, and without reauthorization, states can tax internet access.

Attempting to attach the poorly written MFA to broadly supported bipartisan “must pass” legislation is as wrongheaded as was passing the MFA without a single hearing. Rather, Congress should pass ITFA without the MFA and return to regular order, like that being followed in the House Judiciary Committee, for any consideration of the MFA or similar legislation. The result will be better, indeed fair, for all sellers — regardless of their retail business model.

Jonathan Johnson is chairman of the board of directors for Overstock.com.

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