Statement of Andrew Moylan Regarding the Senate Committee Hearing on "Marketplace Fairness"


Chairman Rockefeller, Ranking Member Hutchison, and distinguished Members of the Committee, thank you for the opportunity to submit testimony on behalf of the American Taxpayer regarding the issue of “marketplace fairness” in state sales tax collection. My name is Andrew Moylan and I am Vice President of Government Affairs for the National Taxpayers Union (NTU), a non-partisan citizen group founded in 1969 to work for lower taxes and smaller government at all levels. NTU is America’s oldest non-profit grassroots taxpayer organization, with 362,000 members nationwide.

Few citizen groups in Washington can match NTU’s 43-year history of principled advocacy on behalf of taxpayers, which is why I hope you will find these comments expressing our serious concerns with S. 1832 (the “Marketplace Fairness Act”) and other similar bills helpful in the Committee’s vital work. You can also find further research into these topics on our website at

In short, we believe that such legislation would be profoundly detrimental for taxpayers and remote retailers both large and small because it would dismantle a vital safeguard in the tax policymaking process, create a decidedly “unlevel” playing field, impose enormous compliance burdens on businesses, and harm beneficial economic competition among states by reducing incentives to simplify sales taxes.

Current Law and the Marketplace Fairness Act

Current law prevents tax authorities from forcing a retailer of any type to collect and remit its sales tax unless it has a tangible physical presence in the state. This is a result of the 1992 Supreme Court case, Quill v. North Dakota, where a Delaware-incorporated office supplier with no presence in North Dakota was found to not be obligated to collect and remit on the latter state’s behalf. The Court held that extraordinary sales tax complexity rendered the interstate commerce burden of mandatory collection on out-of-state businesses too great to be constitutionally permissible.

Though states cannot compel non-resident businesses to collect and remit their sales tax, customers are still required to pay “use tax” in lieu of conventional sales tax on an item. The use tax regime, however, is largely ineffectual because it requires self-reporting of which most taxpayers are simply unaware and is difficult to enforce. As a result, states (and competitors to remote retailers) have been clamoring for the federal government to override established protections by ordaining a dramatic expansion of their tax authority.

S. 1832 would change current law by allowing states to enforce tax collection and remittance obligations on businesses regardless of physical presence. This would give states licenses to effectively substitute new sales tax requirements on businesses in the place of their current use tax systems. The end result would be more sweeping tax powers, huge new compliance burdens for businesses, and millions (or billions) of new dollars flowing out of the pockets of taxpayers and into the hands of state and local governments, many of which have failed to control their spendthrift proclivities.

S. 1832 Dismantles Vital Taxpayer Safeguard

Contrary to the claims of many Marketplace Fairness Act proponents, current law is not a “loophole” that was implemented as some sort of deliberate attempt to advantage Internet retailers in the World Wide Web’s infancy. Instead, the Court’s decision drew on and emphasized a bedrock foundational principle of tax policy: the physical presence standard. Simply stated, this standard generally prevents tax entities from extending their authority beyond their physical borders. As a result, businesses and taxpayers alike are shielded from predatory tax administration ploys that might seek to target non-residents for revenue.

The physical presence standard is a strong protection from overzealous tax collection tactics and a fundamental safeguard in American tax policy that is broadly applied as the appropriate boundary which states must observe when asserting tax prerogatives. Physical presence is a constraint on tax collectors that exists in many other areas of tax policy, including business earnings and individual income taxes.

As but one example of the wide-ranging relevance and respect given to the physical presence standard, in May of this year the House unanimously passed H.R 1864, the “Mobile Workforce State Income Tax Simplification Act.” This critical legislation, which NTU strongly supported, prevents states from requiring income tax filing or withholding from workers unless they reside in the state or work there for more than 30 days in a calendar year. This common sense criterion will prohibit unfair income tax filing requirements on non-residents and it has at its core the wise counsel of the physical presence standard.

What the Marketplace Fairness Act would do is erase the physical presence standard for the purposes of remote retail sales (but of course maintain it for brick-and-mortar sales). The result, as outlined further in this testimony, would be an abandonment of the limits on taxing powers that have served our federal system so well for decades – even centuries – on end.

In fact, S. 1832’s language makes very clear the slippery slope to extinction on which it would place the physical presence standard. Section 5(b) of the bill reads like an admission that the legislation could have grave implications for taxpayers: “No obligation imposed by virtue of the authority granted by this Act shall be considered in determining whether a seller or any other person has a nexus with any State for any tax purpose other than sales and use taxes.” In other words, the bill’s authors are attempting to promise that its language strips away the physical presence protection only for sales taxes and not with individual or business income levies, for example.

This is about as comforting to taxpayers as the claims from its inception that the income tax would apply single-digit rates to only the wealthiest of filers. True, the Sixteenth Amendment and subsequent Revenue Act of 1913 didn’t expand the tax to its current levels right away, but it blew the levee protecting ordinary taxpayers wide open and subjected them to a century of ever-creeping taxation. The Marketplace Fairness Act would similarly dismantle one of the few strong taxpayer protections left: the physical presence standard.


Marketplace Fairness Act Would Yield Distinctly “Unlevel” Playing Field

Proponents of S. 1832 argue that their bill is intended to “level the playing field” between brick-and-mortar and remote retailers, but in reality it would do the exact opposite. While the legislation would require remote sellers to collect sales tax on every item, it would force them to do so by a completely different and unequivocally harsher set of rules than exist for brick-and-mortar sales.

If the Marketplace Fairness Act were to pass, states could strong-arm remote sellers into complying with more than 9,600 separate sales tax jurisdictions across the country, each of which can issue its own unique set of edicts and definitions. The reason is that S. 1832 would concoct a “destination-based” sourcing regime which compels a business to collect sales tax based not on its own physical location, but on the location of its customer. An online business would, in turn, have no choice but to quiz each and every customer on their residence, look up the appropriate rate for their locality, and then remit what is collected to a distant tax agency.

Meanwhile, when a brick-and-mortar retailer makes a sale in one of its stores, it doesn’t have to jump through any of those hoops. When a customer checks out at a register, they are not interrogated about their residence and then charged the prevailing rate in that locality. This is because brick-and-mortar retailers effectively operate on an “origin-based” sourcing rule, one that collects tax based upon the actual location of the business rather than the consumer. Even states that technically operate their tax regimes under destination-based sourcing rules for traditional retail sales tend to short-circuit them: they attempt to mimic origin-based sourcing by simply assuming that the “point of delivery” of an item is not where its customer lives but where it gets handed back to the customer at the cash register.

This clever bit of maneuvering allows brick-and-mortar retailers across the country to operate on a system whose compliance, at least as far as tax laws are concerned, can be relatively straightforward. Each business determines the prevailing sales tax where it is located and charges that to all of its customers, regardless of their eventual destinations. The Marketplace Fairness Act would deny that administrative convenience to remote retailers by pressing them into a cross-examination process for each and every customer – in the end, decreeing submission to thousands of different sales tax codes.

S. 1832 Imposes Tremendous Compliance and Interstate Commerce Burdens

Because they would now answer to 9,600 tax jurisdictions across the country, remote retailers would have to shoulder heavy overhead costs just to meet their new tax collection liabilities. In fact, the Marketplace Fairness Act essentially acknowledges its imposition of major expenses and complexity by including an exemption for businesses that have remote sales of $500,000 or less per year. The very existence of this provision makes it clear that even sponsors and supporters feel compliance would exact an unbearable toll upon small sellers.

Unfortunately, S. 1832’s paltry exemption level (the Small Business Administration threshold for defining a small business is $30 million in sales, while the Marketplace Fairness Act’s exemption is only $500,000) would do little to ease the suffering of smaller businesses, which would be afflicted with even greater competitive disadvantages compared to larger ones  as a result of the bill’s passage. A 2006 PricewaterhouseCoopers study provides some instructive, eye-opening guidance in this regard. Based on their findings, businesses with between $1 million and $10 million in sales would face compliance costs nearly 2.5 times those endured by larger firms (above $10 million in sales). The smaller the business, the bigger a share of its sales siphoned off just to navigate the maze of our extremely complicated sales taxes.

Some businesses would collapse under the weight of these compliance loads, and others would have to raise their prices substantially in order to make ends meet. As a result, the Marketplace Fairness Act would raise serious impediments to interstate commerce due to its misguided approach toward this issue. Congress has the duty and authority to prevent states from enacting policies that significantly harm interstate commerce, and yet paradoxically S. 1832 would encourage such damage at an especially fragile time for our economy.

Tax Simplification Efforts Have Largely Failed

Much of the movement behind the Marketplace Fairness Act is justified by notions of simplifying sales tax codes across the country. While the Streamlined Sales Tax Project (SSTP) and other efforts have expended much energy on this worthy task, the sad fact is that state sales taxes today are more complex than ever. The number of tax jurisdictions has steadily risen in the 12 years since SSTP’s inception and our nation is nowhere close to the sort of uniformity and ease of administration the project sought to create.

For a glimpse into the reality of sales tax complexity, consider the dilemma of determining when ice cream is a baked good for Wisconsin’s tax purposes. writer Josh Barro recently discussed a bulletin from the Wisconsin Department of Revenue seeking to clarify the tax treatment of ice cream cake.

“The memo goes through ten different examples of cake sales, of which seven are taxable and three are not. Here’s an excerpt:

Example 4 – Same as Example 1, except that Restaurant A does not make the ice cream cake. However, after purchasing the ice cream cake from its supplier, Restaurant A decorates the ice cream cake according to instructions received from its customer. It adds designs and words made from frosting and edible gels. Since the retailer mixed or combined two or more foods or food ingredients (i.e., the ice cream cake and the frosting and edible gels) for sale as a single item, the ice cream cake sold by the retailer is ‘prepared food’ and subject to Wisconsin sales or use tax.

The key issue here is that ‘prepared foods’ are taxable, but foods that are simply bought and resold are generally not prepared foods, and baked goods are not “prepared” even if you bake them yourself, though they may be prepared if you don’t bake them but do decorate them.

If I understand the memo correctly, the rules are as follows. Ice cream cake is a taxable prepared food if you make it yourself, but not if you’re just reselling the cake. However, if the cake contains real cake layers, it’s a non-taxable baked good no matter who made     it, so long as the amount of cake exceeds the amount of ice cream. (No, really: Example 9 is a cake with two cake layers and one ice cream layer, which is tax exempt; Example 10 is a cake with one cake layer and two ice cream layers, which is taxable because it doesn’t contain enough cake.) If you buy a cake from someone and then decorate it yourself, it’s taxable no matter how much flour it contains. And if you slice any cake and serve it in individual servings, or if the cake consists of fewer than four servings, or if the customer is going to eat the cake on the premises at your business, or if you give the customer utensils with his cake, it’s a taxable prepared food, though you may be exempt from that last one if the sale of prepared foods is incidental to your business.”

This is a vivid illustration of the true challenge of tax complexity: how a given item is defined. For instance, is a granola bar candy or food? Different states have different answers, each of which may yield different tax obligations. Marketplace Fairness Act proponents claim that there are modern software solutions to address the difficulties of compliance, but that is like saying that TurboTax has solved our mind-numbingly complex federal income tax code. The computing power to do the basic math involved has existed for decades, but software alone simply cannot solve the ice cream cake conundrum.



The debate over S. 1832 and similar forms of legislation boils down to differences in business models and how governments ought to respond to them. When big-box retail began to threaten true “Main Street,” “Mom and Pop” businesses, neither federal nor state officials took substantial action to “level the playing field” between the two beyond treating them fairly before the law. Nobody suggested legislation to grant Main Street businesses the same deals with suppliers that higher-volume big-box stores could negotiate. No one insisted on a law evening out potential price differences because ultimately competition is beneficial for consumers.

Now Internet retail is beginning to provide a counterweight to brick-and-mortar retail of all types. Even still, only about $7 of every $100 in retail spending occurs online. The Internet will undoubtedly continue to grow, but it has a long way to go before truly threatening the dominance of local retail. Indeed, for all the supposed dangers that the “e-fairness” lobby conjures up in support of its position, there are benefits that have flowed to “Main Street” retailers from the advent of the Internet, including online consulting services, streamlined inventory management, and the ease of “B2B” transactions at the wholesale level. Ultimately, however, the online model of utilizing a smaller physical footprint and relying on technology to reach customers is much like any other throughout the history of commerce: it has advantages and disadvantages that are judged in the marketplace – which is precisely why brick-and-mortar retailers aren’t rushing to close down their physical storefront infrastructure.

This competition between business strategies will likewise benefit consumers in the long run. Instead of attempting to equalize outcomes by imposing upon remote sales (and not brick-and-mortar sales) an onerous tax-compliance structure, governments should endeavor to protect taxpayers and treat all businesses fairly by maintaining the physical presence standard of taxation.

S. 1832, the Marketplace Fairness Act, is detrimental to the interests of taxpayers, businesses, and sound tax policy. There are other ways, like uniform origin-based sourcing, to address this matter without trampling on vital pro-taxpayer checks and balances, and without foisting unworkable schemes on remote sellers as well as interstate commerce. Simply treating remote sales in the same way that we already treat brick-and-mortar sales today and devoting any additional revenue to tax rate reductions could level the playing field in an honest way without burying taxpayers in the process.

Over the past year NTU has extensively examined the origin-based sourcing concept and would look forward to constructive discussions with Committee staff to explore further legislative options. In the meantime, NTU urges you to oppose this bill and any other variants that rely on the same destructive destination-based sourcing approach. Thank you for the opportunity to submit this testimony to the Committee today and we would be honored to work with you on this highly consequential issue in the future.