D. Dowd Muska


Scrap the MFA -- Keep the ITFA

October 30, 2014

Virginia has one. Arizona, too. Kansas, Nevada, and Maryland are on the list.

Deep into the “recovery,” many states are suffering from current-fiscal-year budget deficits. For panicked pols and bureaucrats, “help” could be on the way. On December 11, the Internet Tax Freedom Act (ITFA) expires.

Born at the midpoint of the Clinton administration’s second term, the ITFA prohibited state- and local-government taxes “on Internet access” and banned “multiple or discriminatory taxes on electronic commerce.” Levies “imposed and actually enforced prior to October 1, 1998” were grandfathered, protecting Hawaii, New Mexico, North Dakota, South Dakota, Texas, Ohio, and Wisconsin. To this day, The Wall Street Journal reported, the “moratorium enjoys widespread bipartisan support in Congress.” Rep. Chris Cox (R-CA) and Sen. Ron Wyden (D-OR) were its original champions, and George W. Bush and Barack Obama have singed renewals.

Contrary to a persistent myth -- more on that later -- the ITFA does not bar taxes on Internet shopping. Only online-access charges are shielded. Nowhere in the legislation’s text does the phrase “sales tax” appear.

For U.S. households, the ITFA has provided a decade and a half of welcome relief. According to a recent analysis by the Tax Foundation: “Americans pay an average of 17.05 percent in combined federal, state, and local tax and fees on wireless service. This is comprised of a 5.82 percent federal rate and an average 11.23 percent state-local tax rate.” In seven states, the foundation’s researchers found, “consumers pay total taxes and fees in excess of 20 percent of their bills.”

Every state, as well as many municipal entities, would be taxing Internet accounts if not for the IFTA. “Public servants” appreciate the levies placed on utilities, from natural gas to direct-broadcast satellite, electricity to cable television. The taxes aren’t entirely hidden. But buried at the bottom of bills and invoices, many of which no longer exist in paper form, they’re far less visible than the taxes applied to paychecks, homes, land, and vehicles. Remember Mobutu Sese Soko’s precept: “If you steal, do not steal too much at a time. ... Steal cleverly, little by little.”

In both congressional chambers, there’s a push to make the ITFA permanent and repeal its grandfather clause. Governors and mayors, predictably, are whining over the “loss” of loot. With the “public” sector at all levels too big and too expensive, their argument is unworthy of rebuttal.

A thornier objection involves the principle of federalism. Is the ITFA an overreach? It may seem so, but Washington has safeguarded potential targets of state and local taxes before. Electricity generation, bus and airline tickets, offshore energy production, railroads, and satellite communications are a few examples. The inherently interstate nature of the Internet places the ITFA in the company of proscriptions already in place.

In exchange for a set-in-stone, no-exceptions ITFA, some have proposed a truly terrible trade. To ensure passage, they’re willing to back the “Marketplace Fairness Act (MFA).”

In 1992, the Supreme Court ruled that, in the words of the far-left Center for Budget and Policy Priorities, “a state cannot require an out-of-state merchant to charge sales tax to the state’s residents unless the seller has a physical presence (such as a warehouse) within the state.” The MFA authorizes an elaborate scheme to obliterate the High Court’s prudent standard.

As one opponent observed, it is not “fair or right to collect sales tax from a company that has no physical presence in a state.” Vendors do not derive “public benefits” from paying the tribute, nor are they permitted to vote for the politicians who set tax rates and determine compliance regulations. Besides, most beyond-borders purchases made via the Internet are subject to use tax -- i.e., customers must remit the amount that would have been owed, usually when they pay their annual income-tax obligation. Adherence to the edict is nearly nonexistent. (A 2011 California analysis found that 0.42 percent of filers disclosed and paid use tax.) Perhaps finally enforcing it would prove to be politically unpalatable?

The claim that stores on “Main Street” are at a disadvantage to their cyber-competitors ignores shipping costs. As for foregone revenue, despite the predictions made amidst the dot-com mania, online shopping has not become the norm. In the second quarter of 2014, it accounted for a flimsy 6.4 percent of total retail sales.

Acquiescing to the MFA, in exchange for a permanent and non-grandfathered ITFA, is a bad bargain. Don’t compromise, tax fighters. No matter what concessions are granted, the unlimited-government lobby is always back for more.

D. Dowd Muska (www.dowdmuska.com) writes about government, economics, and technology. Follow him on Twitter @dowdmuska.

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