Cameron Smith: Marketplace Fairness Act might hurt Alabama’s web-based businesses

  As our state government continues to face fiscal challenges, Alabama Gov. Robert Bentley and a number of other lawmakers are pushing the Marketplace Fairness Act (MFA) as an integral part of the revenue solution.

  In 1939, Alabama enacted a use tax to prevent businesses outside of the state from enjoying a competitive advantage over in-state businesses required to charge, collect and pay sales tax. Almost 75 years later, interstate commerce has changed radically. Lawmakers imposing the 1939 tax could never have anticipated the relatively recent explosive growth in e-commerce.

  According to the U.S. Census Bureau’s most current E-Stats report (PDF), e-commerce accounted for almost $5 trillion in sales in 2011. When the next report arrives this year, those numbers are only expected to increase.

  Alabama residents are responsible for paying the state’s use tax (PDF) each time they make a purchase from an out-of-state vendor. Unfortunately, Alabama’s use tax is severely outdated. Not only does it contain a laundry list of 37 statutory exemptions, but it also requires Alabamians to file a return by the first of the month following the month in which they make a purchase from an out-of-state business.

  To further complicate matters, some web-based retailers with a physical presence in Alabama already collect sales tax on purchases, eliminating the need for their customers to pay the use tax. Because the tax is self-reported and compliance with the outdated tax is a hassle, underreporting is common.

  The use tax is currently the closest Alabama can come to charging sales tax on out-of-state purchases. Absent congressional authorization, the Constitution bars states from burdening interstate commerce by attempting to collect sales taxes from businesses that do not have a physical presence in the state.

  To address the flaws in Alabama’s use tax system, Gov. Bentley and other political leaders are banking on the MFA, currently before the United States House of Representatives. Under the legislation, Congress would permit states to compel their in-state businesses to collect sales taxes for out-of-state sales and remit taxes to those jurisdictions. In short, Alabama would require its web-based businesses to track, collect and submit sales taxes for every jurisdiction where they ship their goods. In exchange, Alabama’s state government stands to increase its tax revenues as other states do the same.

  Even with Alabama’s financial troubles, Alabama’s House delegation and state lawmakers should exercise caution before embracing the MFA. Proponents of the MFA argue that the legislation simply closes a "loophole" enjoyed by web giants like Amazon in order to level the playing field for local mom-and-pop businesses.

  This so-called "loophole" is the Constitution limiting the taxing power of states to their respective borders. E-commerce has grown exponentially even as the economy has struggled. Requiring web-based companies to collect, track and send sales taxes to a significant number of taxing jurisdictions is a burden on a business model consumers increasingly demand from Alabama businesses.

  Ironically, that burden is much easier to handle for the big box retailers and large web-based operations that actually support the MFA. Amazon already deals with different tax jurisdictions across the nation, and chain stores with a physical presence in virtually every state currently pay sales taxes on their Internet transactions. Streamlining taxes across the nation makes economic sense for their business models.

  While the proposed tax bureaucracy might be easier for large web-operators, smaller businesses creating jobs here in Alabama may not fare as well.

  For Duda Energy, LLC, a company that sells alternative energy production equipment and supplies in Decatur, the MFA would mean a significant increase in tax administration and liability. "With internet sales driving our business model, the legislation would force a decision between growing our business and dedicating those resources to national tax compliance," said company president Brian Duda.

  Alabama’s use tax is unwieldy, unclear and many Alabamians may not even know it exists. But the need to address the state law does not immediately require national action. The MFA’s simplistic answer may not be the right solution for the growing number of Alabama businesses using the web as an on-ramp to the national and global marketplace.

  About the author: Cameron Smith is vice president and general counsel for the Alabama Policy Institute, an independent, non-profit research and education organization dedicated to the preservation of free markets, limited government and strong families. He may be reached at camerons[at]alabamapolicy.org or on Twitter @DCameronSmith.

  This article was published by the Alabama Policy Institute.