Fact Check on MFC’s “Setting the Record Straight” 5-21-13 letter

In a 5/21/13 letter to the House and Senate Republicans, The Marketplace Fairness Coalition wanted to “set the record straight” on the Marketplace Fairness Act (MFA).  They claim to be “committed to correcting the public record regarding the many misstatements from opponents of the Marketplace Fairness Act.”  Meanwhile, MFC continues to mislead and downplay inconvenient facts.

“We remain open to any ideas for strengthening or otherwise improving this legislation so long as the ultimate goal of restoring states rights and leveling the playing field for all businesses is achieved”  There has never been any indication that any of the Pro-MFA points are valid or could be addressed by their organization and they don’t allow any comments on the website.  This would not appear to be open.

And if this legislation exempts 99% of online sellers (their number, which we don’t believe) – how does this level the playing field if 99% of sellers still aren’t collecting sales taxes? 

Let’s go through the “Heritage Foundation Myths” they’re fact checking.

HERITAGE MYTH #1: MFA is Taxation Without Representation

“Our nation was born from the idea of “no taxation without representation”—
that citizens should not be taxed by governments in which they have no political 
voice. Yet now lawmakers in Washington want to overturn that bedrock 
principle in order to extract more revenues from American consumers.”

“MFA would allow states to collect taxes currently owed from consumers at 
the point of purchase.  Opponents often try to confuse the issue by making it 
seem like the business is paying the tax, when it is the consumer who actually 
owes and pays the sales tax.”

The complaint against representation is related to retailers with no physical presence being saddled with unreasonable burdens, which was confirmed by the 1992 Quill Supreme Court decision.  MFC also confuses the issue by mixing up sales tax and use tax.  The states have the rights to create and enforce a use tax on purchases made by their residents.  Most states do.  This example is a use tax and no one is stopping the state from enforcing existing laws on the books in their own states. 

HERITAGE MYTH #2: MFA Will Harm “Small Businesses”

“But not all businesses are signing on to this new scheme. Etsy, an e-commerce 
hub where individuals can sell handmade items such as arts and crafts, warned 
yesterday that the legislation would ‘unnecessarily burden small businesses.’ 
Most Etsy sellers work from home and don’t have the administrative resources 
to comply with the law.” 

“The MFA specifically protects truly small businesses by including a $1 million 
exemption on remote sales.  To put this in perspective, over 99 percent of all 
online sellers will not be affected by this legislation in any way.  Not  surprisingly, Heritage, eBay, Etsy and others who posit this red herring 
argument have not been able to dispute this fact.   In contrast, every brick and-mortar retailer must collect on the first dollars of sales as a basic part of 
doing business.”

Again, would love to see any source for the 99% figure.  Lots of smaller and larger businesses will be affected and damaged by the compliance and audit costs of this bill.  And there is NO contrast between brick and mortar here regarding collecting sales tax, it’s a falsehood.  Online retailers are based somewhere, and collect sales tax for shipments to the state they have a physical presence (nexus) from the first dollar also.  They are  Main Street as well. 

“Additionally, for the less-than-one-percent of online sellers who fall under 
MFA, the legislation requires each state to provide free tax software that will 
allow them to quickly and efficiently calculate, collect and remit sales tax. The 
MFA also includes liability protections for sellers and limits against audits. ”

Any free software would be standalone and could and would vary from state to state.  Frankly, there’s no way to integrate each state’s unrelated software into an e-commerce system.  The only realistic way is to use paid software.  The time and effort to integrate it as much as possible is significant and Avalara (for example) only supports a small subset of all the carts and order processing systems right now.  And they don’t support Amazon sellers.  There would be initial work, cost, and then ongoing yearly costs every year.

Audit Risk?!  PLENTY.  Nothing in the MFA meaningfully reduces audit risk.  The only language reducing the risk is if the software provided by the state miscalculates the tax due.  That’s the only safe harbor the MFA offers in section 2g “Relieve remote sellers and certified software providers from liability to the State or locality for incorrect collection, remittance, or noncollection of sales and use taxes, including any penalties or interest, if the liability is the result of incorrect information or software provided by the State.”

MFA actually CONFIRMS one of the worst parts of the MFA’s audit risk.  Perhaps the MFC should read it sometime.  Section 2a requires that audits be limited to a single entity PER STATE “a single audit of a remote seller for all State and local taxing jurisdictions within that State”  So now remote sellers face up to 45 audits per year, not 1.  No fairness about that at all.

 HERITAGE MYTH #3: Collecting Sales Taxes Is Too Complex

“According to the Tax Foundation, there are 9,646 tax jurisdictions in the United 
States, creating the kind of complexity that would frighten any small 
business.  “How can we possibly know the tax rates in [those] jurisdictions?” 
said Overstock.com CEO Patrick Byrne. “In one jurisdiction, cotton candy is food; 
in another it’s entertainment or candy”

“You don’t need to take our word on this one – as eBay CEO John Donahoe 
even admitted to the Wall Street Journal recently, ““levying and collecting the 
taxes would be a matter of software upgrades.”
•  Mr. Donahoe is correct – software is available in the marketplace today that 
makes it easy for sellers to calculate any state’s sales tax with a simple clickof-the-button. And again, the Marketplace Fairness Act requires states to 
provide such software to businesses free-of-charge.  ”

As covered above, free tax software isn’t free and won’t handle the actual needs of a business processing orders by phone, catalog, Amazon, etc..  Frankly, Mr. Donahoe has one of the largest IT staffs in the world, so he probably wasn’t thinking that through in that converstation.  And of course, they didn’t quote the rest of Mr. Donahoe’s sentence:

 “the real risk is that “this bill allows the state taxing authorities to audit anybody, to question anybody, to go after anybody.”

If a small online seller — perhaps a home business with just a few staff — faced simultaneous tax audits from a number of different states, the costs in complying with the audits could be ruinous. The result, Mr. Donahoe said, is that “the same stuff will sell, just by bigger sellers. The small guys will bear the burden.””

 HERITAGE MYTH #4: MFA Will Threaten The Economy

“Executive Director Steve DelBianco said NetChoice opposes the bill because of 
its incredibly complex sales tax regimes that threaten a fragile economic 
recovery”

“Again, you don’t need to take our word for it.  In a recent op-ed for the 
Wall Street Journal, noted conservative economist Arthur Laffer
predicted the exact opposite, writing that failure to level the playing 
field will hurt economic growth”

Laffer’s predictions were presented again Thursday and were in the USA Today.  We don’t believe the layers of assumptions upon assumptions that the numbers require, and they also depend on a University of Tennessee study that so far has dramatically overestimated the amount of taxes due when compared to real world rates.  But if you believe them or not, doesn’t matter.

What matters is even if believe Laffer’s report 100%, the gains reported in the report require states to follow his advice and make MFA revenue neutral by reducing income taxes by the same amount.  This caveat makes the positive aspects report meaningless.  Only a couple of states have pledged a tax reduction of any kind.  And Laffer’s report leaves out the negative impact of new taxes being implemented by all the other states.  Even Laffer would agree that collecting on an effectively new tax will hurt economic performance by his models and beliefs.  And again, if 99% of sellers aren’t affected by this, there’s no “leveling of the playing field”.

HERITAGE MYTH #5: Small Businesses Will Be Audited

Frankly, we’re amazed this is considered a myth by the Marketplace Fairness Coalition.  They either don’t understand the law or they’re intentionally deceiving.  I’m guessing the latter since they’re paid to help pass the MFA, not to be an honest broker regarding the flaws in the law.

“Small online retailers like the business that just wants to sell Virginia ham and 
peanuts to hungry customers around the country would be smothered by the  
cost of complying with so many sales taxes. Not to mention that they would be 
subject to time-consuming and expensive audits from 46 sales tax states, the 
District of Columbia, U.S. territories and possessions, Puerto Rico, and Native 
American tribes. ”

“Again, over 99 percent of all online sellers will not be affected by this 
legislation in any way.  Beyond that, this false claim ignores the language of 
the bill.  As we noted above, this legislation requires states to provide sellers 
with free software that calculates the sales tax due at the time of filing and 
files sales tax returns.  And, the bill also specifically limits the liability of 
sellers using the state-provided software. ”

We’ve covered this above, so no need to say it again.  However, MFC completely parses their language here about limiting liability of sellers.  We’ve covered the narrow safe harbor if the software makes mistakes, but that has nothing to do with audits or being audited.  From another post, direct quotes from Avalara white papers cover the audit issues:

“Some businesses mistakenly believe that if they don’t make major mistakes they will not

be audited. That is incorrect. Audits are often prompted by external causes, such as revenue shortfalls or changing tax rules.  States are becoming increasingly aggressive in

auditing businesses” [i]

 

“To make up this lost revenue, many states are increasing audit activity to recoup lost use tax.” [ii]

 

“If a notice is received and that person is on vacation, no one is available to handle the

concern and respond quickly to the request for information or clarification from

the state. Delayed responses can place you at risk of being selected for an audit

and can expose you to possible penalties and fees for not resolving the notice.

 

The state can restrict your business activities and even halt business until

the notice is resolved. One company didn’t realize they had received a notice

at their Texas location. The notice languished on someone’s desk unheeded. The

company found out when the state notified them that their ability to do business

had been shut down in that state. It was a scramble of extra time and cost in

penalties to bring the business back into active status in the state.” [iii]



[i] Ibid.  Page 7

[ii] The Challenges of Use Tax Compliance, Avalara.  Page 4.

[iii] The Hidden Costs of Your Manual Sales and Use Tax System, Avalara 2011, page 3.

HERITAGE MYTH #6: Conservatives Do Not Support MFA

“The Internet sales tax passed the Senate, but a growing chorus is pointing out 
that it would hurt many to help the tax man.”

Actually, you’re putting words in their mouth.  Of course some conservatives support laws that not all conservatives are behind.  Yes, some do support the MFA.  Arthur Laffer among them, but contingent on tax cuts that aren’t in the MFA bill at all.    No real myth here.

HERITAGE MYTH #7: MFA Has Been “Rushed Through” Congress

Honestly, a minor point.  It went through the Senate in an unconventional manner, but it’s late and this post is long enough.  Not worth debating this one.

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