NCPA - National Center for Policy Analysis

Problems with the Marketplace Fairness Act

March 31, 2014

There is little evidence that states would collect the billions of dollars in revenue that proponents claim would come as a result of the Marketplace Fairness Act, says Pamela Villarreal, a senior fellow at the National Center for Policy Analysis.

In 1992, the Supreme Court ruled that a business could not be required to collect a state's sales tax unless that business had a physical presence in the state. With the growth of online sales, lawmakers in Washington, D.C., have turned to the issue. Last year, the Senate passed the Marketplace Fairness Act (MFA), which grants states the ability to collect and remit sales taxes for each buyer's state. The House of Representatives has yet to pass the bill.

Estimates of lost revenue vary, but many project that retailers could collect between $22 billion and $24 billion in sales taxes through the MFA measure. These figures are likely overstated, and the vast majority of e-commerce sales are actually business to business sales, not business to consumer transactions.

Currently, 45 states require citizens who purchase online or out-of-state products to report those purchases on their tax forms and pay a use tax. However, taxpayers rarely do this.

  • Many are not even aware that a use tax is due, and because use tax reporting is not required on federal tax returns, there are no IRS penalties for failing to report the tax.
  • On top of this, there are plenty of exceptions that vary state-to-state and make compliance confusing. For example, Connecticut exempts bicycle helmets, fluorescent bulbs and state flags from the use tax, while Mississippi exempts Girl Scout cookies and New York exempts weaving products.
  • Currently, $13 billion in revenue is lost from noncompliance, according to economist Art Laffer. He estimates that this figure will grow to somewhere between $27 billion and $33 billion by 2022.

Proponents say tax collection would be easy for vendors, but if that is the case, why does the MFA exempt small businesses with revenues below $1 million? The bill contains some protections for sellers, but they are worded vaguely and could be interpreted in various ways.

States that have use tax laws should use their own taxing authorities to enforce compliance, not burden private sector vendors with the task.

Source: Pamela Villarreal, "The Marketplace Fairness Act: Tilting the Playing Field," National Center for Policy Analysis, March 2014.


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