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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