Sales Tax Bill Threatens Economy|
May 14, 2013
The impact of the Marketplace Fairness Act (the so-called Internet Sales Tax Bill) which passed the Senate on May 6 received limited coverage in a May 10 Numismaster column. However, it deserves a much more detailed discussion. The negative effect it will have on numismatic and precious metals transactions will be dwarfed by the potentially disastrous economic fallout throughout the U.S. economy.
As former Congressman Jimmy Hayes explained at the American Numismatic Association’s National Money Show in New Orleans last week, the label of “Internet Sales Tax” is completely inaccurate. The bill applies to all forms of remote selling, including by mail, telephone, television, radio and Internet. Nowhere in the bill does the word “Internet” appear.
Here are some of the potential financial pitfalls that lurk if the bill is enacted: The bill enables every jurisdiction that charges sales tax to audit sellers. That includes 45 states, the District of Columbia, 740 American Indian tribes, and thousands of local governments across the country. Maybe a business can absorb the costs of an audit by one or two governments, but what if 20 entities came to audit? Although these audits would be conducted by the state government where the seller lives, the overhead costs of audits could put some smaller sellers out of business.
The bill does not mandate, but it does, allow retroactive collection of sales and use taxes that were never paid. Do you think that the prospect of collecting five or more years of unpaid sales and use taxes will encourage governments to perform more such audits?
The bill does not prohibit sales and use taxes on services. It could potentially get so bad that investors might have to pay use taxes on stock trades they made a few years ago, consumers might end up paying use taxes for the pipeline transmission services for the natural gas used to heat homes and consumers might also end up paying taxes on services like haircuts, telephone services, doctor visits, bus rides, labor for auto repairs and much more. Service taxes could potentially be compounded by imposing them retroactively from prior years.
The software must be provided for “free” by any state that wants to become part of this streamlined sales tax project. However, that does not relieve the sellers of installation costs and staff training.
Mr. Hayes thinks that it may be possible that jurisdictions may be authorized to impose an administrative tax of up to 2.7 percent on top of the regular sales tax rate. This would make a 6 percent sales tax rate effectively as high as 8.7 percent. I did not see this language in the actual bill, but the bill made numerous references to the Streamlined Sales and Use Tax Agreement (SSUTA). My review of the SSUTA did not uncover this provision, but I am not an expert at reading such documents.
This legislation represents an outright increase in taxes paid by people. This is different than simply having the Federal Reserve create new “money” out of thin air. The impact will be harshest on the poor and low-income citizens.
The National Conference of State Legislators estimates that states lost $23 billion in uncollected sales taxes for the year 2012 solely from Internet sales. When you add the sales and use taxes that were never paid on remote sales by other sellers, any success in acquiring these uncollected taxes will have a significant impact on consumers. Higher taxes will hamper the ability of consumers to spend and will discourage their doing so. Apparently, government officials think they can collect tens of billions of dollars more of taxes without reducing consumer purchases at all.
It is true that some purchases are for life’s necessities, where higher sales and use taxes will have little effect on total demand. However, consumers with less money to spend will have to curtail their expenditures for discretionary goods and services. To give one real life example – the State of Michigan raised the sales and use tax rate from 4 percent to 6 percent on May 1, 1994. My company’s retail sales in Michigan immediately declined by one-third, meaning that the Michigan Treasury did not collect any more sales and use taxes than before and suffered a decline in personal income tax collections from the staff who lost their jobs or saw their hours cut.
As you can see by the experience of my own company in 1994, customers of rare coin and precious metals dealers are highly sensitive to the burden of sales and use taxes on such purchases. There are 20 states that currently impose sales and use taxes on all rare coin and physical precious metals transactions. If remote sellers to customers in those states are forced to collect sales taxes, demand will be severely diminished.
The Marketplace Fairness Act does carry a huge loophole for buyers. Foreign sellers, including those in Canada and Mexico, are not covered by this legislation. If enacted, I would expect a major increase in Americans making purchases from foreign sellers. Unfortunately, that is almost certain to result in much higher instances of fraudulent transactions where consumers have less recourse than they would for purchases from U.S. sellers.
Beyond the governments who anticipate collecting more taxes upon enactment of this bill, the main beneficiary would be the online seller Amazon. Amazon has incurred the costs of developing software to collect sales and use taxes nationwide and owns almost all of the related copyrights on it. The company already markets this software to Wal-Mart. It is likely to be the only certified vendor eligible to sell this software to the various state governments. This prospect of making huge profits from such sales may explain why Amazon has been so aggressive in lobbying for enactment of this legislation.
In sum, should this bill become law, expect it to fail as a means to collect all the taxes that state governments claim are now not being paid. Expect to see more Americans lose jobs as consumers shift a greater percentage of purchases to foreign sellers (which will have the effect of reducing income tax collections). I foresee a rise in consumer fraud with less ability to combat it. This will affect the entire economy, not just rare coin and precious metals customers and dealers. As for the numismatic market, with profit margins much lower than for most industries, the impact could be devastating for both buyers and sellers.
Patrick A. Heller is the American Numismatic Association 2012 Harry Forman Numismatic Dealer of the Year Award winner. He owns Liberty Coin Service in Lansing, Mich., and writes “Liberty’s Outlook,” a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at www.libertycoinservice.com. Other commentaries are available at Coin Week (www.coinweek.com and www.coininfo.com). He also writes a bi-monthly column on collectibles for “The Greater Lansing Business Monthly.” His radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 a.m. Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at www.1320wils.com.)
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