Previously we have noted that the proposed Marketplace Fairness Act of 2013 purports to “level the playing field” between brick-and-mortar and Internet retailers, but that its design actually substitutes one unlevel playing field for another. Now that the bill has passed the Senate and moved on to the House, a comparison of the options might be helpful for showing that every potentially level playing field is unlevel in other ways.
There are at least three ways by which tax equity might be achieved:
- Every sale regardless of jurisdiction bears the same tax rate on the same list of taxable goods and services.
- Every sale within each jurisdiction bears the same tax rate on the same list of taxable goods and services, but jurisdictions vary in accordance with State and local laws, and the jurisdiction depends on the seller.
- Every sale within each jurisdiction bears the same tax rate on the same list of taxable goods and services, but jurisdictions vary in accordance with State and local laws, and the jurisdiction depends on the buyer.
Each of these options maintains equity in one dimension but necessarily results in inequity on others. The table below summarizes this.
|Equity to Buyers||Equity to Sellers||Equity to Governments|
|Status Quo||No. Buyers bear different taxes depending on seller’s jurisdiction.||No. Sellers charge different taxes based on seller’s and buyer’s jurisdiction.||No. Sales tax revenue differs for remote and in-person sales.|
|Marketplace Fairness Act||Yes. Buyers bear the same tax on all remote sales.|
|No. Buyers bear different taxes on extra-jurisdictional remote and in-person sales.||No. Strong economies of scale in tax collection for thousands of jurisdictions favor large sellers.||No. Disadvantages States with low or zero sales taxes and States unwilling to join Federal compact.|
|1: Constant tax regardless of sales type, regardless of buyer’s or seller’s jurisdictions.||Yes. Buyers bear the same sales tax regardless of their presence or residential jurisdiction. Buyers comply with 1 tax law for all purchases.||Yes. Sellers charge the same sales tax regardless of buyer’s presence or seller’s jurisdiction. Sellers comply with 1 tax law; no economies of scale across sellers in tax compliance.|
|No. States must relinquish control over sales tax to Federal government. Federal sales tax increases tax collections in some jurisdictions, lowers them in others.|
|2: Constant tax regardless of sales type, based on seller’s jurisdiction.||Yes. Buyers bear the same sales tax regardless of their presence or residential jurisdiction.||Yes. Sellers charge the same sales tax regardless of buyer’s presence. Sellers comply with 1 tax law.
||Yes. Each jurisdiction retains its own tax policy.|
|No. Buyers must comply with thousands of tax laws.||No. Sales tax varies by jurisdiction; invites tax competition and retail relocation.|
|3: Constant tax regardless of sales type, based on buyer’s jurisdiction.||Yes. Buyers bear the same sales tax regardless of their presence.||No. Strong economies of scale in tax collection favor large and exempt sellers. Sellers must charge different taxes depending on buyer’s residential jurisdiction.||Yes. States retain control over tax policy for sales within their jurisdictions.|
|No. Buyers bear different taxes depending on whether their residential jurisdiction.||No.||No. States’ residents are subject to taxation by other States in which they have no representation.|
The top row summarizes the equity implications of the status quo. However popular it may be, it violates conventional equity principles across the board. This suggests that public support for equitable taxation is limited.
The second row shows the equitable effects of the proposed Marketplace Fairness Act. With respect to buyers, it has equitable in some respects (it treats them the same whether or not they are present) and inequitable in others (it imposes different taxes on extra-jurisdictional purchases depending on whether they are conducted in-person or remotely).
The table reveals why option #1 is a nonstarter. Although it has important equitable features for both buyers and sellers, there is no interest among the States in relinquishing to the Federal government or a compact of States the authority to set sales tax policy.
Option #3 is similar but not the same as the proposed Marketplace Fairness Act. To solve the problem of charging different taxes on extra-jurisdictional remote and in-person sales, it would require sellers to obtain and buyers to reveal their residential jurisdiction for every purchase. Improved equity would come at the price of privacy, substantial transactions costs, and potentially overwhelming incentives to violate the law by providing false information. Public support for this option likely would be weaker than support for the proposed Marketplace Fairness Act, showing again that the pursuit of a more level playing field has greater rhetorical than actual advantages.
Option #2 achieves more equitable objectives than the status quo or any of the other options. It would ignore the buyer’s jurisdiction for all sales and rely solely on the seller’s jurisdictions. This would avoid the high transactions costs of the proposed Marketplace Fairness Act and the privacy concerns of option #3. It would require remote buyers to comply with potentially thousands of different tax jurisdictions, though it would do nothing more than treat them as residents of the seller’s jurisdiction for purposes of sales tax.
Option #2 could have potentially significant dynamic effects. In the short run, prospective buyers would shop around for sellers in low tax jurisdictions, and sellers in these jurisdictions would promote themselves by revealing this information. In the long run, sellers focusing on remote commerce would locate (or relocate) to low tax jurisdictions. If given the option, buyers and sellers alike might well prefer option #2 because of its simplicity and low transactions costs. Low tax States also would prefer option #2, but high tax States very much would not. And the pressure to enact the proposed Marketplace Fairness Act is coming from high tax States.