Economics, Taxes and Spending

The Internet sales tax: How Congress ‘not working’ works very well

Image Credit: Shutterstock

Image Credit: Shutterstock

The Senate is currently considering the Marketplace Equity Act, the internet sales tax my colleagues James Pethokoukis and Abby McCloskey have reviewed favorably in the past few days. The law is sound on principle: it merely allows states to collect sales tax that they are already legally due, and it enjoys broad bipartisan support. The Marketplace Equity Act was introduced in the last session, which commentators broadly decried as “the most dysfunctional Congress” in recent history. Consistent with that criticism, Congress took no action on that bill during that session.

But if they had passed it then, it would have been an unmitigated disaster for internet startups.

When the House Judiciary Committee held a hearing on HR 3170 they called seven witnesses. Of the seven, one spoke for context, five spoke in favor of the bill, and only one spoke opposed.

The witness against was NetChoice – a trade association representing small e-commerce companies. NetChoice commented that if the law wasn’t substantively amended, it would have serious “unintended” consequences that would stop internet startups dead in their tracks. HR 3170 recognized that the burden on the seller of kicking taxes back to the state and locality of every individual buyer would be too great for small firms, and accordingly exempted companies doing less than $1 million in annual revenue. NetChoice pointed out that the way the law was crafted, once a firm surpassed that mark, it would suddenly be subject to audit by 47 state agencies. A mis-entry here, a software malfunction there, and the business could have dozens of audits leveled against it. For small businesses getting by on the margins, the law would have been a Sword of Damocles hanging over their heads.

If the last Congress hadn’t been so “dysfunctional” this law could well have passed as it was written. The effects wouldn’t have received much press… just another soft squeeze on American entrepreneurship.

But Congress didn’t act. And we should all be thankful for it. The Senate amendments offered to the Marketplace Equity Act clearly took NetChoice’s criticism to heart. Where before there was nothing, there are now multiple clauses exempting small businesses from liability if it stems from recent changes in state tax law and from software malfunctions – lifting the sword from over entrepreneurs’ heads.

This inside-baseball backstory provides a, perhaps rare, example of the legislative process working as it should. Two lessons can be drawn from this:

1. Congress “not working” works well. As Amity Shlaes recounts, President Coolidge believed that stopping bad laws from being passed was a more important task than passing new laws. A little bit more of that attitude from our administration, Congress, and the press would go a long way toward intelligent governance.

2. Without extensive hearings, even simple laws court disaster. The Marketplace Equity Act was fewer than three printed pages, and presumably written by smart and well intentioned folks. Yet it still contained a glaringly obvious problem with a simple to fix solution. Without the outside criticism of NetChoice, this might have been missed until it was too late. Writ large, this example should illustrate the folly of introducing massive bills and giving them short and curt hearings.

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