Today's Senate Commerce hearing on the awful Marketplace Fairness Act, a bill the likes of which we've been crusading against for more than a decade now, was a comedy of errors that would have been funnier if it weren't so sad. Despite a stacked panel of six supporters testifying against just one opponent, the proceedings proved that there are huge problems for taxpayers inherent in legislation to allow states force enormously burdensome sales tax collection requirements on remote retailers WITHOUT any physical presence there. In addition, the hearing led to a stunning discovery that one panelist's business may well be collecting sales taxes incorrectly and illegally. So much for "easy" and "accurate" tax collection.
Steven Bercu, CEO and co-owner of BookPeople book store in Austin, Texas, told the committee that he felt so strongly about collecting sales taxes that his business did so even for sales into states where he has no physical presence. He has no legal obligation to do so, but he likened it to a kind of civic obligation to support infrastructure and services in other states (nevermind the fact that shipping companies that help deliver his items already do plenty of that through income and gas tax burdens of their own).
The revelation of illegal tax collection came when Steve DelBianco, Executive Director of NetChoice, gave his testimony. In it, he presented a screenshot of a purchase he made on BookPeople's website this morning which showed that he was charged what was purportedly Virginia state sales tax of 8.25%. There's only one problem: Virginia's sales tax is 5%. Mr. Bercu quickly proclaimed that a mistake had likely been made and that he'd look into it with the provider of the service that calculates sales tax collection for his business. It turns out that 8.25% is actually the prevailing sales tax rate in Austin, Texas, where BookPeople is physically located. In all likelihood, this is the source of the mix-up.
While it was somewhat amusing to uncover this mistake, it also suggests that the tax was illegally charged to DelBianco. If BookPeople collected and remitted on behalf of Virginia, they illegally overcharged him because no business can collect more than the legal sales tax rate. If they collected and remitted to Texas, they illegally charged DelBianco on a transaction which was not subject to sales tax. Under current law DelBianco has no sales or use tax obligation whatsoever in Texas and if BookPeople charged him one, that was just as illegal as a grocery store charging someone sales tax on something in a state where food is exempt from it.
Let me state that I don't believe that Mr. Bercu and BookPeople are intentionally defrauding customers or governments. This is almost certainly an honest mistake made in the process of a good-faith effort, but it shows just how difficult accurate sales tax collection and remittance can be. His business was supposed to be the poster child for how easy collection is. After all, it's so easy that he does it even though he isn't legally required to! But even the best of intentions can't iron out mistakes resulting from the confusion of 9,600 taxing jurisdictions with different rules across the country. It also suggests that perhaps the reason Mr. Bercu and BookPeople were so convinced of the ease of collecting is that his business was simply charging everyone Austin's sales tax. Current law would need to change in order to accommodate that, but that sort of an origin-based taxation system is dramatically simpler and easier to comply with than what the Marketplace Fairness Act would impose.
In the end, the hearing was mostly a jumble of minimally-useful talking points from supporters and some brief but passionate questioning from the likes of Senators Jim DeMint (R-SC) and Kelly Ayotte (R-NH). The bottom line for taxpayers is still this: the Marketplace Fairness Act undermines basic taxpayer protections by eliminating the physical presence standard, imposes huge compliance and interstate commerce burdens, and does little or nothing to promote tax reform and revenue neutrality.