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Why Internet Sales Tax is Bad Public Policy (Opinion) The Marketplace Fairness Act, expected to pass in the Senate on May 6, requires online retailers to charge shoppers their state's sales tax. Is the law a poor political move?

By Scott Shane

entrepreneur daily

Opinions expressed by Entrepreneur contributors are their own.

On May 6, the Senate is expected to pass the Marketplace Fairness Act, which would require sellers who generate more than $1 million per year in online revenue to collect and remit the applicable state sales tax for their customer's state of residence. Under current law, businesses only need to collect sales taxes if they have stores, warehouses or some other type of physical presence in a state.

Proponents, including online giant Amazon and retail giant Wal-Mart, say the bill eliminates inequities in the current system and brings needed revenue to states without imposing much of a burden on retailers. I disagree and hope that the House of Representatives puts a stop to the proposed law.

The law's advocates say the added sales tax would not burden online retailers because the states must provide them with free computer software to calculate taxes due and create a single entity to collect taxes for all jurisdictions in their state. Unfortunately, the burden of collecting an online sales tax wouldn't lie in calculating the rates, but in collecting and paying the tax monthly to 45 different states, each with their own procedures, inquiries and audits for business owners to follow.

The bill's proponents also tout it as a solution to an unfair system. Economists argue that tax rates should be the same whether people buy products and services from a local supplier or one far away. If local purchases are the only ones taxed, people become more likely to buy from distant suppliers, creating economic distortions.

Under our existing system, bricks and mortar retailers in states that have a sales tax are obligated to collect taxes, while online retailers without a presence in the state are exempt, allowing online shoppers to pay less than customers who buy from bricks and mortar establishments in sales tax states. According to proponents of the new act, this is unfair.

Related: The Internet Sales-Tax Showdown and Your Bottom Line

But the proposed law won't eliminate unfairness. Consider this example. Under the new law, if you live in Massachusetts, you will still have to pay sales tax (6.25 percent) on the toaster you buy at a store in state, but if you drive to a store in neighboring New Hampshire, you won't. The only difference under the new law is that an online retailer that ships the toaster to you would have to charge you Massachusetts sales tax. But just as with the current law, bricks and mortar sellers in states with no sales tax would be able to undercut competitors' prices because they wouldn't have to charge the added tax. If policy makers were really concerned about the issue of fairness, all customers -- regardless of whether they are buying online or in person -- would have to pay a sales tax based on their state of residence.

The National Governors Association says that the proposed bill would provide about $22 billion in added revenue to states and local governments and allow states to avoid raising other taxes.

If the new law kept states from raising income taxes, which are more economically distorting than sales taxes, an internet sales tax might be worthwhile. But the proposed legislation does nothing to preclude state governments from charging higher income tax rates even after they collect the added internet sales tax. In other words, this is just a recipe for Americans to pay higher taxes.

Related: As Tax Reform Stalls, Small-Business Owners Spend Up To 150 Hours on Their Taxes

Scott Shane

Professor at Case Western Reserve University

Scott Shane is the A. Malachi Mixon III professor of entrepreneurial studies at Case Western Reserve University. His books include Illusions of Entrepreneurship: The Costly Myths That Entrepreneurs, Investors, and Policy Makers Live by (Yale University Press, 2008) and Finding Fertile Ground: Identifying Extraordinary Opportunities for New Businesses (Pearson Prentice Hall, 2005).

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