Sales Tax Plan the Death of Many Online Shops?

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WASHINGTON -- Many small companies that do business online are worried a plan working its way through Congress could force them to shut down.

Congress is working a plan to collect sales tax on Internet purchases currently going uncollected right now.

"It's about $23 billion in uncollected taxes," Stephen DeMaura, with Americans for Job Security, said.

DeMaura represents those who favor the plan, called Marketplace Fairness Act. It would require companies that make more than $1 million online to collect sales tax for every transaction.

Stopping Tax Dodgers

DeMaura and his allies claim this would level the playing field with brick-and-mortar businesses that already collect sales tax.

He told CBN News it would also stop tax dodging.

"This is a tax that is already owed by every consumer and person who purchases something on the Internet," he said.

About 93 percent of people either don't know about or just choose not to obey that requirement when they fill out their state tax forms.

"They are supposed to remit this tax to their state. Of course, most people don't do this," DeMaura said.

So if the Marketplace Fairness Act becomes law, these online businesses would be forced to collect sales tax from every customer, no matter what state the business is in and no matter what state the customer is in.

'States Looting Other States'

That may sound simple enough, but there are more than 9,600 taxing districts, many with different rates and rules than the others.

Bartlett Cleland, with the Institute for Policy Innovation, believes this makes the proposed law neither fair nor constitutional. It's why he calls it "The horribly Ill-Named Marketplace Fairness Act."

He said Supreme Court rulings have made it clear only businesses with a physical presence in the same state as the consumer buying from them have to collect sales tax from that consumer.

This is why he believes the Marketplace Fairness Act goes against constitutional principle.

"The legislation empowers a state, for instance the state of Texas, to reach across into Louisiana and tax people in Louisiana. It's exactly what was happening in the Articles of Confederation," Cleland explained.

"Anyone remembers their history remembers we quickly said, 'Ooh, this is bad. We've got states looting other states.' We had states actually printing their own money to try to drive other states out of business," he said.

Critics like Cleland complain the Marketplace Fairness Act is a resurrection of taxation without representation. State politicians could collect sales tax from the residents of other states, people who can't vote them out of office.

Simple or Not

Terri Alpert takes this all very personally. Her Connecticut web company Uno Alla Volta connects art lovers with artisans all over the world. 

It's a small business she said would likely go under if the Marketplace Fairness Act becomes law.

"My main objection is not in principle collecting tax for states, but the actual complexity. If it isn't simplified such that we can actually do it, I don't know how we can stay in business. It's that simple," Alpert said.

One study estimates it would cost companies more than $20,000 in the first year just to comply because the new law will be so complex.

Imagine trying to keep up with all the different tax rates and requirements of the nation's 9,600 taxing districts across all the very different states that have a sales tax.

Alpert fears a state like California could come after someone like her in Connecticut over some legal dispute involving these taxes.

"I could be audited by any of these states. They could create laws that are discriminatory to out-of-state sellers. And as an out-of-state seller I'd have no recourse except going to their state to pursue it," Alpert said.

These are reasons why Alpert and other worried business owners have organized to lobby against the Act as it moves its way through Congress. It's already passed the Senate.

'Huge Growth Potential'

On the other side of the issue, DeMaura insisted no one should worry because he believes the law will force states to simplify the process of complying with the Marketplace Fairness Act.

And he said top economist Arthur Laffer, who sold the Reagan administration on supply-side economics, predicts this will actually grow the American economy.

"There could be huge growth potential. He predicts 1 to 1.5 million jobs, getting us on 3-plus percent growth across the country," DeMaura said of Laffer.

Both believe states legislatures will be able to take pro-growth measures because of the e-Tax.

DeMaura predicted they will use that money to lower other more burdensome taxes, like income taxes or business taxes.

Still, the public doesn't like it, with one Gallup poll showing 57 to 39 percent against it. 

And America's youngest voters, the 18 to 30-year-olds most likely to purchase on the Internet, oppose the Marketplace Fairness Act 73 to 27 percent.

Is it Worth the Fix?

Alpert and her allies suspect what's behind much of the push for this is greedy states just wanting new money.

"The states right now are really looking for, I think, an easy fix. You know, anything that can bring in new revenue. But you don't want to wreak economic destruction in your attempt to collect every last cent," she said.

Alpert pointed out if online businesses like hers have to fold, that throws scores of people out of work.

"In my case, we support many small artisans all around the country and all around the world, many of whom were downsized from corporate jobs and are now making a living pursuing their passions making art," Alpert said.

And so the online entrepreneur joked the Marketplace Fairness Act is a very deceptive name.

"I kind of think of it as calling something The Apple Pie and Motherhood Act -- when you might want to poison people and take their children away from them," she said.

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Paul  Strand

Paul Strand

CBN News Washington Sr. Correspondent

As senior correspondent in CBN's Washington, D.C., bureau, Paul Strand has covered a variety of political and social issues, with an emphasis on defense, justice, and Congress.  Follow Paul on Twitter @PaulStrandCBN and "like" him at Facebook.com/PaulStrandCBN.