Why I Oppose the Internet Tax Bill

Why I Oppose the Internet Tax Bill

By Sen. Ted Cruz - May 5, 2013

Basic tenets of economics dictate that when you tax something, you get less of it. That’s why it’s incomprehensible that the U.S. Senate is moving to raise taxes on one of the brightest sectors of our struggling economy.

The Internet is a thriving ecosystem of entrepreneurial freedom that should be protected and nourished. It has allowed new businesses to compete in the national marketplace in ways that would have been impossible 15 years ago, and it empowers consumer choice. But tax-hungry politicians view the Internet as yet another source of revenue to bail out their big-spending governments.

The misleadingly titled Marketplace Fairness Act is a job-killing tax hike, plain and simple. It is, in effect, a national Internet sales tax, which would hammer the little guy and benefit giant corporations.

Senators who vote for it are voting to impose audits, compliance costs, lost wages, and inefficiency on small businesses in every state. And they are potentially crippling an engine of new job creation at a time of economic struggle. This bill will not create jobs; it will not create new opportunities; and it will not create the economic growth our country needs and our people deserve.

Currently, online sellers collect sales taxes based on their physical location. The MFA, however, would fundamentally change how businesses collect those taxes. Instead, it would require online retailers to charge taxes based on the consumer’s location or where the product is ultimately consumed. That’s like your grocery store quizzing you on where you’re going to eat those apples or Hallmark asking where you’re going to send that Christmas card. The compliance burdens associated with charging taxes based on the consumer’s location are mind-numbingly complicated.

Consider this: Online and catalogue retailers with gross sales of $1 million -- a level that is mom & pop size in many places -- will be forced to collect sales taxes for the country’s 9,600 state and local tax jurisdictions. Just as Obamacare punishes small business with taxes and regulations for employing more than 50 people, this legislation would punish small businesses for making more than $1 million in sales. For many businesses it may be more beneficial to make less money than to keep track of all the different taxes.

Small and medium-size businesses would be subjected to monthly or quarterly tax returns to all 46 states who collect sales tax; in addition, one amendment likely to be added to the bill would also include all 565 federally recognized Indian tribes in the definition of “state,” so businesses would need to collect applicable taxes for them, too.

As if that wasn’t enough, each of the nearly 10,000 jurisdictions gets to have its own tax rates and sales tax holidays with thresholds and caps. Each state can give sellers their own “tax app” and it’s up to the seller to pay for integration into their in-house systems for ordering, fulfillment, and accounting.

Keep in mind, each state still gets to have its own audit, forms, tax base, and definitions. That means every online seller could be subject to dozens -- or eventually hundreds -- of audits each year.

So, how is this fair? 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? Or to underwrite New York City Mayor Michael Bloomberg’s nanny statism or Chicago Mayor Rahm Emanuel’s anti-Second Amendment agenda?

Make no mistake: Big business supports this bill because it will drive smaller competitors off the Internet and out of business.

And it wouldn't help small brick-and-mortar retailers, as its proponents claim, because the sales they are losing today are mostly going to big-box stores and giant online retailers -- both of whom are already paying sales taxes.

The largest online retailers already have physical business presences in most states. Meaning, they are already collecting and paying the state taxes. Right now, nine of the top 10 Internet retailers collect taxes in every state. Big businesses can afford to hire accountants and attorneys to pay the taxes properly and navigate audits.

Instead, this bill would just impose crushing new costs on small and mid-size Internet retailers.

Enjoy Web-based entertainment such as Netflix and iTunes? Or how about the projected 56 billion apps downloaded in 2013? Well, this bill will open the door to new taxes on every TV show, movie, game, song, or app you download.

Naturally, state and local governments are salivating at the prospect of getting a purported $23 billion in new revenue from the private economy. Especially when the out-of-state consumers paying those taxes and the out-of-state businesses owners who collect them can’t vote them out of office.

Last but not least, this bill doesn’t pass constitutional muster. The MFA overturns the fundamental idea that states’ taxing authority ends at their borders. The Supreme Court has said that an out-of-state business could subject itself to a state's taxing power if due-process concerns are satisfied, namely that the business purposefully targets its activities in that state. But because pure Internet sales by their nature don't target any one state, this legislation presents a serious constitutional problem.

Raising the tax burden on small businesses in one of the still-thriving sectors of our economy doesn't make sense. And, imposing a national Internet sales tax while the nation is still trying to desperately to create jobs and provide new opportunities for millions of Americans still struggling to find work is economic foolishness. 

Ted Cruz is a United States Senator for the state of Texas.

Sen. Ted Cruz

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