Arthur Laffer explains online sales taxes. Updated

posted at 11:31 am on July 20, 2013 by Jazz Shaw

Lost among many of the big stories this week was a rather uncomfortable moment on Fox News when Arthur Laffer went public with a study which claimed that the Marketplace Fairness Act was actually a net plus for fiscal conservatives. This immediately drew the ire of popular conservative leaders, including Ted Cruz, but Laffer has been approaching the study of this issue from a perspective of necessary evils. (You can see a lot of our previous coverage of the MFA here.)

Laffer says the bill offers cash-strapped states a shot at beefing up their budgets and argues the plan doesn’t create a new tax but instead gives states the opportunity to go after taxes they were already owed.

“All taxes are bad, some are just worse than others,” Laffer told FoxNews.com during an interview on Wednesday. “When you look at this carefully, this is exactly what you want. The lowest tax rate on the broadest possible base.”

Arthur Laffer is perhaps most famous for his “invention” (though he admits he didn’t actually create the idea) of the Laffer Curve. (A novelty item, still quite popular among fiscal conservatives, which demonstrates an undeniable truth about tax rates and taxpayer participation. Unfortunately, it immediately makes itself completely useless since you can never accurately determine precisely where you are on the curve nor the human response to the next change in rates in either direction unless you are at or very near one of the extremes on the axis.) Still, Laffer remains a venerable voice in the ongoing tax debates, so it was very interesting to see him go so far as to pen an editorial on the subject of the MFA.

Because state sales taxes generally have fewer loopholes and lower rates — and therefore have a lesser impact on growth and employment — pro-growth policies should favor sales over income taxes where possible. True reform should include addressing the online sales tax loophole.

A move towards e-fairness would give states an opportunity to use additional online sales tax revenues to lower rates on more burdensome taxes, such as the personal income tax. This would create a more efficient tax system and correct a fundamental distortion of the retail marketplace, where traditional retailers must collect the sales tax and their online competitors don’t.

Sadly, Laffer’s article doesn’t really touch on the question of the administrative burden the MFA would presumably place on small businesses dealing with the vagaries of tax law across multiple state lines. (This is a valid concern which Hot Air readers have discussed at length when I’ve written about this in the past, and definitely a question which deserves an answer from the act’s proponents.) But, unfortunately, people arguing Laffer’s position rarely get far enough in the debate to give it a full airing. The entrenched fiscal conservative position often begins and ends with, “Ugh. Taxes bad. Hulk smash taxes.” And there the conversation tends to stop.

UPDATE: (Jazz) A reader writes in with the following information regarding the tax collecting burden on small businesses. Apparently virtually all of the actual “small businesses” who would struggle the most with collection are exempted, and the bill requires that free software which calculates the tax for other states must be provided for those complying. Any of you legal eagles want to take a crack at it? You be the judge. (Emphasis from sender.)

From the text of the Senate bill.

SEC. 2. AUTHORIZATION TO REQUIRE COLLECTION OF SALES AND USE TAXES.

(a) STREAMLINED SALES AND USE TAX AGREEMENT.—Each Member State under the Streamlined Sales and Use Tax Agreement is authorized to require all sellers not qualifying for the small seller exception described in
subsection (c) to collect and remit sales and use taxes with respect to remote sales sourced to that Member State pursuant to the provisions of the Streamlined Sales and Use Tax Agreement, but only if any changes to the Streamlined Sales and Use Tax Agreement made after the date of the enactment of this Act are not in conflict with the minimum simplification requirements in subsection (b)(2).

(b) ALTERNATIVE.—A State that is not a Member State under the Streamlined Sales and Use Tax Agreement is authorized notwithstanding any other provision of law to require all sellers not qualifying for the small seller exception described in subsection (c) to collect and remit sales and use taxes with respect to remote sales sourced to that State, but only if the State adopts and implements the minimum simplification requirements in paragraph (2). Such authority shall commence beginning no earlier than the first day of the calendar quarter that is at least 6 months after the date that the State—
(1) enacts legislation to exercise the authority granted by this Act—
(A) specifying the tax or taxes to which such authority and the minimum simplification requirements in paragraph (2) shall apply; and
(B) specifying the products and services otherwise subject to the tax or taxes identified by the State under subparagraph (A) to which the authority of this Act shall not apply; and (2) implements each of the following minimum simplification requirements:
(A) Provide—
(i) a single entity within the State responsible for all State and local sales and use tax administration, return processing, and audits for remote sales sourced to the State;
(ii) a single audit of a remote seller
for all State and local taxing jurisdictions within that State; and
(iii) a single sales and use tax return to be used by remote sellers to be filed with the single entity responsible for tax administration.
A State may not require a remote seller to file sales and use tax returns any more frequently than returns are required for nonremote sellers or impose requirements on remote sellers that the State does not impose on nonremote sellers with respect to the collection of sales and use taxes under this Act. No local jurisdiction may require a remote seller to submit a sales and use tax return or to collect sales and use taxes other than as provided by this paragraph.
(B) Provide a uniform sales and use tax base among the State and the local taxing jurisdictions within the State pursuant to paragraph (1).
(C) Source all remote sales in compliance with the sourcing definition set forth in section 4(7).
(D) Provide
(i) information indicating the taxability of products and services along with any product and service exemptions from sales and use tax in the State and a rates and boundary database;
(ii) software free of charge for remote sellers that calculates sales and use taxes due on each transaction at the time the transaction is completed, that files sales and use tax returns, and that is updated to reflect rate changes as described in sub- paragraph (H); and
(iii) certification procedures for persons to be approved as certified software providers. purposes of clause (iii), the software provided by certified software providers shall be capable of calculating and filing sales and use taxes in all States qualified under this Act.
(E) Relieve remote sellers from liability to the State or locality for the incorrect collection, remittance, or noncollection of sales and use taxes, including any penalties or interest, if the liability is the result of an error or omission made by a certified software provider.

UPDATE 2: (Jazz) There’s not only been a lot of informative feedback in the comments, but this thread led to a couple of contacts from both the small business community and online shoppers from rural areas who would be most affected by this legislation. There are some eye opening observations of how the promises in the bill don’t work out as billed. Rather than making a late addition after the piece has headed toward the bottom of the page, I’ll put them in their own separate post tomorrow. If you know of any other folks who would like to contact us from verifiable sources with their own experiences along these lines, let me know.


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so what happens when an overseas vendor charges someone in the US with tax? How will people know that the vendor is overseas and not subject to US tax law? How will that affect business here in the US? Will this cause even more businesses to move out of country to avoid this?

Dannic on July 20, 2013 at 2:56 PM

Absolutely idiotic. I suppose the supply and demand curve is also “a useless novelty item” because it functions in the exact same way, except that it describes supply and demand.

NotCoach on July 20, 2013 at 1:40 PM

When people are having less children because of the economy, it’s clear that raising taxes will ease their burden.

WryTrvllr on July 20, 2013 at 2:58 PM

The “complexity” issue is so easily solved: simply levy the tax at the location of the seller and not the buyer. Yes, you have to determine the location for the big guys, and that isn’t as easy as for mom&pop internet businesses. You have the seller determine from which locations the goods will ship, and charge sales tax accordingly. (I would make this the case for any business that shipped directly from warehouses.)

GWB on July 20, 2013 at 2:59 PM

The point isn’t the businesses too small to be affected, it is that Amazon is moving to prevent another Amazon from arising. They have an established market and system, with the Kindle tie-in and Amazon Prime and other shipping deals, it is already very difficult to compete. And Amazon has already struck deals with many states, they had to because their distribution centers give them a technical presence.

The second point is there is nothing “unfair” about the present system. Online businesses receive NONE of the benefits of the sales taxes, no police, fire, or EMS protection, etc. Their customers don’t even put wear and tear on roads and bridges.

States have had their “use taxes” forever, most require you to declare and submit sales tax on items purchased out of state – but it was up to the state to figure out how to collect them.

Does the federal government have nothing better to do?

Adjoran on July 20, 2013 at 3:05 PM

I’ve said it before, and it bears repeating:

If you define “fairness” as one party not having an advantage over another, pursuit of fairness is a fool’s errand.

gryphon202 on July 20, 2013 at 3:10 PM

The “complexity” issue is so easily solved: simply levy the tax at the location of the seller and not the buyer. Yes, you have to determine the location for the big guys, and that isn’t as easy as for mom&pop internet businesses. You have the seller determine from which locations the goods will ship, and charge sales tax accordingly. (I would make this the case for any business that shipped directly from warehouses.)

GWB on July 20, 2013 at 2:59 PM

Additionally, the incentive is to lower taxes, not raise them, for those states which have the nexus of seller will want to encourage sellers to relocate to their states, thus creating jobs.

That’s exactly the approach San Bernardino took in convincing Amazon to build its warehouse there — it rebates to Amazon a huge hunk of tax money. California was quite upset over San Bernardino’s doings, but as a California resident, I really enjoy paying 3% rather than 9% on Amazon fulfillments from San Bardoo.

unclesmrgol on July 20, 2013 at 3:10 PM

Huge administrative burden on businesses – that will be passed onto the customers – dealing with the tax laws across multiple state, county, and city lines.

Not about Fairness.

ama on July 20, 2013 at 3:13 PM

If Amazon pays the sales tax to San Bernardino, they don’t have to pay any one else (other states)? (unclemrgol 310pm) The buyer isn’t on the hook for a use tax?

Can we have more discussion on the Art 1 Sec 9 issue?

thank you ajacksonian.

goatweed on July 20, 2013 at 3:43 PM

E-Verify is even easier to use so, should be mandated nation-wide immediately. That software is free too. If E-Verify is too cumbersome then, surely this is 100x worse for business.

Jeff2161 on July 20, 2013 at 5:17 PM

US Constitution, Art. I, Sec. 9:

No Tax or Duty shall be laid on Articles exported from any State.

Separate clause.

Passive clause.

It pertains to all governments in the US and all branches thereof.

It is not part of a State restrictive Section, either.

ajacksonian on July 20, 2013 at 2:55 PM

Yeah … that old Constitution thingy. Congress got past it and Barky doesn’t know or care what it is. He’s illiterate, anyway.

ThePrimordialOrderedPair on July 20, 2013 at 6:09 PM

If it weren’t for Larry Kudlow putting Laffer, who “is” a joke on this issue, on his show once in a while he would be forgotten in a few months. This is all the regime needs. A supposed conservative advocating a huge tax! I can see the far left salivating now.

rodguy911 on July 20, 2013 at 6:15 PM

Why should an out of state seller collect sales tax for the buyers state/city? While brick and mortar stores are forced by the gubRmint to do it without compensation…….at least that store get some services from the thugs (fire, police et al)……. tell ya what …. next time I sell a pair of dirty underwear on ebay, to a buyer in Detroit. I collect Detroit’s sales tax when Detroit sanitation collect my trash 1000 miles away.

roflmmfao

donabernathy on July 20, 2013 at 6:20 PM

Post updated again. Too much good stuff for one article, so we’ll run another one tomorrow which relays some 1st hand accounts of business owners and online shoppers with direct experience showing how this bill might be even worse than some folks have indicated. It’s an eye opening experience to be sure.

Jazz Shaw on July 20, 2013 at 7:57 PM

the Laffer Curve. (A novelty item, still quite popular among fiscal conservatives, which demonstrates an undeniable truth about tax rates and taxpayer participation. Unfortunately, it immediately makes itself completely useless since you can never accurately determine precisely where you are on the curve nor the human response to the next change in rates in either direction unless you are at or very near one of the extremes on the axis.)

Not entirely true.

If tax rates go down and tax revenues go up, you know which side of the curve you were on to begin with. And, you know that you should continue to keep cutting taxe rates until revenues actually go down (an indication that you’re on the other side of the curve).

The second part of the “Bush Tax Cuts” were signed May 28, 2003, and turned the economy around… both employment and revenues went UP as a result of the Bush Tax Cuts.

Even though the Bush Tax Cuts cut tax rates for everyone who paid taxes, revenues in FY 2007 were 44% larger than FY 2003 revenues!

… Which means that the Bush Tax Cuts should have been followed up with even MORE cuts, to see if revenues went up again! If revenues went up again, even more cuts should have been passed until we exceeded the peak of the laffer curve and ended up with lower tax revenues. At that point, the last round of cuts could be rescinded.

ITguy on July 20, 2013 at 9:17 PM

President George W. Bush “inherited” the Dot Com bust and the 9/11/2001 attacks, both of which hurt our economy and decreased employment (increased unemployment).

The second part of the “Bush Tax Cuts” were signed May 28, 2003, and turned the economy around… both employment and revenues went UP as a result of the Bush Tax Cuts.

For employment numbers, use the Employment-population ratio: http://data.bls.gov/timeseries/LNS12300000
For Revenue numbers, use: http://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/hist01z1.xls

Let’s look at the Employment-population ratio in the last month of each Fiscal Year (September) from 2000 onward:

Year Employment-population ratio in September
2000 64.2
2001 63.5
2002 63.0
2003 62.0
2004 62.3
2005 62.8
2006 63.1
2007 62.9
2008 61.9
2009 58.7
2010 58.5
2011 58.4

And let’s look at Receipts (Revenues) from 2000 onward:

Table 1.1—SUMMARY OF RECEIPTS, OUTLAYS, AND SURPLUSES OR DEFICITS (–): 1789–2017

Year Total Receipts (in millions of dollars)
2000 2,025,191
2001 1,991,082
2002 1,853,136
2003 1,782,314
2004 1,880,114
2005 2,153,611
2006 2,406,869
2007 2,567,985
2008 2,523,991
2009 2,104,989
2010 2,162,724
2011 2,303,466

Starting with Fiscal Year 2000, note how both employment and revenues went DOWN in FY 2001, DOWN again in FY 2002, and DOWN again in FY 2003. That’s the effect of the Dot Com bust and the 9/11 terrorist attacks.

But the Bush Tax Cuts turned the economy around. Note how both employment and revenues went UP in FY 2004, UP again in FY 2005, UP again in FY 2006, and while employment dropped slightly in 2007, revenues were UP again that year.

The Bush Tax Cuts improved employment and improved revenues… Revenues in FY 2007 were 44% larger than FY 2003 revenues!

ITguy on July 20, 2013 at 9:18 PM

I may have missed it but: didn’t he say the state income tax should be adjusted and lowered to make it worth while?

Yeah, that’ll happen.

When has any government lowered a tax unless there was immense pressure to do so. So in places where there is only sales tax…Laffer may have a point, but… many states (a few at least) have both… and no way they are cutting income taxes. Ever.

Personally, I have thought it was just a matter of time. All good things come to an end.

petunia on July 20, 2013 at 9:55 PM

Software shall be provided free of charge? Will it be a web API so that it’ll work with everyone’s system? Will all 50 states have similar API’s, just on different state sites, to ease implementation? Where will there be documentation? To where should ecommerce Web developers turn to for support with these API’s? Inexact legislation written by idiots is no different than if the legislators just wrote “STATES SHALL DO RIGHT BY PEOPLE” in a bill.

solatic on July 21, 2013 at 9:43 AM

Which means that the Bush Tax Cuts should have been followed up with even MORE cuts, to see if revenues went up again! If revenues went up again, even more cuts should have been passed until we exceeded the peak of the laffer curve and ended up with lower tax revenues. At that point, the last round of cuts could be rescinded.

ITguy on July 20, 2013 at 9:17 PM

man, I hate you IT geeks. why do you need to think things through like that?

WryTrvllr on July 22, 2013 at 1:39 AM

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