E-Commerce, Taxpayer Rights On the Line in Lame Duck | Commentary

Posted October 21, 2014 at 5:13pm

Most everyone in Washington is fixated on Election Day: November 4. But another date just around that corner also looms large for taxpayers and the Internet: December 11. On that day, the federal ban on Internet access taxes is scheduled to expire. If it’s not extended, states and localities across the country could immediately begin assessing taxes that would make it more expensive for Americans to check their email, read blogs, or watch online videos.

Most members of Congress don’t want to see that happen — that’s why bipartisan legislation to permanently extend the tax ban easily passed the House by voice vote in July. But unfortunately, the bill’s progress was halted in the Senate, where it’s being held hostage because of a vastly more controversial and complicated issue: Internet sales taxes.

Senate leaders want to link these two issues together in a single bill during the lame duck session. Superficially, that might seem appropriate — both pertain to the Internet after all — but in practice, doing so would be a disaster.

The Internet tax moratorium has broad-based support on both sides of the aisle and is essential to keeping the Internet accessible to Americans across the economic spectrum. It can and should sail through Congress and head to the president’s desk.

The Internet sales tax issue is substantially more complicated and must be treated with careful deliberation. Congress could address this matter constructively, but one proposal in particular is so flawed it should be completely scrapped. The so-called “Marketplace Fairness Act” is riddled with problems that would be absolutely devastating for small businesses.

Chief among these are the prospects of exposing businesses to audits by unaccountable out-of-state tax collectors (in around 10,000 jurisdictions) and the tremendously high compliance costs associated with the system. Some estimates place the cost to individual companies in the hundreds of thousands of dollars – enough to bankrupt many smaller online retailers.

While the Marketplace Fairness Act is untenable, Congress should indeed take action to clean up the blurry lines between interstate and intrastate commerce. This has increasingly become a problem as states become more and more aggressive in their attempts to bring in tax revenue.

For instance, several states have utilized linguistic gymnastics to open the door to taxing interstate commerce.

This stems from a 1992 Supreme Court ruling that requires that sellers have a physical presence or “nexus” in a state before that state can collect taxes on transactions. Several states including California, New York and Illinois, have passed laws that stretch the definition of nexus to use affiliate advertising as an excuse to broaden their taxing authority. This has led to conflicting court rulings and a great deal of marketplace uncertainty. Congress needs to step in and fix this.

Addressing Internet sales tax related problems should also open the door to fixing other troubling nexus issues.

For example, Congress should step in to prevent multiple states from taxing a single purchase of a digital good, like a downloaded song or mobile app; ensure that telecommuters aren’t subject to double taxation on their income; and prohibit cumbersome efforts by some states to hound out-of-state telecommunications companies for taxes rather than collecting these taxes at the point of sale.

Congress can and should pass a solution that solves the current messy patchwork of interstate nexus laws and do so without crippling commerce and adversely impacting consumers. The best opportunity for this is not during a lame duck session, where voter accountability is at a minimum, but through the regular legislative process.

In December, Congress should pass the non-controversial permanent ban on Internet access taxes. Come January, it should pivot to fixing more complicated issues surrounding the taxation of interstate commerce. But most importantly, in the rush to wrap up the 113th Congress it should not pass the economically destructive Marketplace Fairness Act.

Brandon Arnold is executive vice president of National Taxpayers Union, “The Voice of America’s Taxpayers.”