Tuesday morning the House Judiciary Committee held a hearing on H.R. 3179, the "Marketplace Equity Act of 2011." Much of the testimony and many of the questions posed by the members of Congress were exactly what you’d expect because many of the arguments around this issue have been well defined for a while. And yet those who favor forcing online and catalogue retailers to become state collectors and comply with more onerous regulations—the so-called “Big Box” stress—constantly try to obscure the critical nature of the issues at hand.
However, one comment offered by Hudson Institute Visiting Fellow Hanns Kuttner stood out. In response to how hard it might be for a remote seller—that is, a merchant in one state selling a product to a customer in a different state—he responded that compliance could not be that difficult because there is an app for that, or there would be soon.
He’s right, in part, but disastrously wrong in large part. In fact, there is an app that, given a buyer’s location (street address is usually needed because of the crazy patchwork of nearly 10,000 taxing jurisdictions in the U.S.), will usually return an accurate answer to what taxes the merchant must collect. Of course, having merchants check an app for each item purchased (oh yes, many jurisdictions require a different tax rate depending on the exact item being purchased) then put that rate into their invoice system is an awkward solution at best.
But this smug response ignores the far larger challenge—and leads Congress to false conclusions.
Computers are quite adept at crunching numbers and applying tax rates. The challenge is in knowing how all those thousands of tax jurisdictions define a product, such as when is a granola bar a confection, a candy or a food? In some places different tax rates apply. What is the difference between a slipper and a shoe? Hundreds of potential definitions can lead to different tax rates. Why should a merchant in one location and a website have to know all those definitions just to run a small store, or even a huge store? This complexity is one of the many reasons that the Supreme Court noted that simplification is critical.
The only bill of goods in this hearing was that the solution is simple. That should tax the patience of the House, and the Senate as they hold a hearing next week.
July 26, 2012