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Sales Tax Bill Threatens Economy
By Patrick A. Heller
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.

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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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Comments
On May 14, 2013 David Campbell said
The Marketplace Fairness Act DOES NOT "allow retroactive collection of sales and use taxes that were never paid".

The bill in NO WAY suggests "investors might have to pay use taxes on stock trades they made a few years ago"!

Mr. Hayes is COMPLETELY WRONG when he "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 is absolutely NOT TRUE, and such an "administrative tax" would be entirely illegal. It isn't suggested in the bill whatsoever, regardless of Mr. Hays "thinks".

The article also says the bill "represents an outright increase in taxes" which it IS NOT. Sales and Use tax laws have been in place for OVER 50 YEARS in most states.

The suggesting that more sales will go to "off-shore" or foreign sellers ignores the fact that ALL packages shipped into this country go through US Customs, which regularly cooperates with states to ensure all taxes can be efficiently collected.

This article is rife with gross misrepresentations. Learn the facts at http://marketplacefairness.org
On May 14, 2013 Patrick A. Heller said
Dear David,
Let me clarify a few points.  Under current sales tax laws, states have jurisdiction to conduct audits of our ot state sellers to check for sales and use taxes that should have been collected and paid but were never paid.  As a practical matter, most state Treasury Departmnts (California is an exception) do not find the yield of higher tax collections from such audits to be worth collecting them.

The Marketplace Fairness Act makes it much easier for out of state jurisdictions to conduct such audits since they would be done by the state treasury where the seller resides.  As a company that has experience multiple sales tax audits over the years, I know that auditors go back multiple years in such audits.  That is why I state that the MFA expedites audits of back years for taxes that were never reported or paid.

THE MFA does not prohibit sales and use taxes on services.  The MFA does not advocate for them.  I listed some extreme potential results of what might happen when the MFA sweeps aside the taxpayer protections of the Interstate Commerce Act.  Will they happen.  Probably no more than a remote prospect, but the doot has been opened for the possibility.

I have a high regard for the information from Jimmy Hayes, but I don't automatically believe everything he says.  In my own reading of the MFA and the Streamlined Sales and Use Tax Act I did not find references to the administrative tax.  Still, Mr. Hayes twice stated this point, so it would make sense to find out exactly what he was referring to.  I didn't have time to check with him before writing the article, which is why I explained that I could not corroborate that point.

Your technical point that the MFA theoretically does not increase taxes due is correct.  I should have said that the MFA was intended to be an outright increase in tax collections, which is the entire focus of this bill.  I apologize for the omission of the one word.

I'm sure that some foreign purchases will be shipped to the US.  However, I am aware that the US Customs fails to detect the import of a high percentage of goods on which duties would be owed.  Further, with respect to buyers of major quantities of bullion-priced gold or silver, I doubt that much of that would ever be imported.  It would make much more sense for the buyer to store it in vaults in Toronto, Zurich, Dubai, Singapore, and elsewhere.  Instead of bullion sales made and delivered in the US, a high part of this activity of sales and storage, will be exported and never owe any import taxes.
On May 15, 2013 David Campbell said
Thank you for your reply. I maintain resistance to the suggestion that any state would (or could) look back to previous periods. As the bill states quite clearly, each state which earns "collection authority" under the bill, does so with a date certain. Given that the collection authority date is prescribed, it is non-sensical to suggest that a state auditor would attempt to pierce or otherwise preceed such collection authority date.

I respect your "extreme examples" idea, but such ideas are not contemplated int he bill, and suggesting they are (or could be) is, at least, misleading and counter-productive. The fact is, ANY state already has the authority to tax (or not tax) anything they want - including the examples you invented. NOTHING about the MFA alters, limits, or expands states already existing authority and soveriegnty on such matters and decisions - those decisions are reserved for the states, and protected by the 10th amendment. Accordingly, Congress cannot alter or limit such state-by-state authority or discretion. Merely suggesting otherwise is a disservice to your readers.

Finally, I would urge you to reconsider your position on the pending legislation because I believe most (if not al) of your concerns have already been addressed by the bill. You have my email address attached to this post, and I look forward to discussing the issue with you directly when you have an opportunity.

Thank you.
On May 15, 2013 Frank Provasek said
Pretty sloppy article with lots of what-if fearmongering.  Foreign mail orders? The long delays and very high cost of international mail and insurance and custom duties is far more than any sales tax would be.  So it's a false argument it would take away sales from US sellers. (Would you buy a 1916-D dime from China to save the sales tax?)  If you fail to collect sales taxes, yes you can be forced to pay back what you failed to pay retroactively. But since out of state sellers have have not been required -- by a Supreme Court decision  -- to collect taxes for other states, changes made under this law  WILL NOT and CAN NOT require any sellers to comply with a new law going back years before the law went into effect.  Gas transmission by pipeline? Stock investments?  These never have been taxable as retail consumer sales, so mentioning them just muddys the issue.  Haircuts?  Personal services like lawn care and haircuts are already subject to sales tax in some states.  But that decision is made the states...so when you mention "The bill does not prohibit taxes on services"  the implication is that this opens the door for new taxes never seen before. It's not mentioned in the bill because it's state issue.  Then this 2.7% extra tax that's not in the bill is just one of the issues in discussion to make this fairer for the sellers. If an eBay seller collects $10 in sales tax, he will only get get back $9.73 after Paypal fees, but has to send the entire $10 to the state.  A 2.7% surcharge on a 6% tax (That's 6.162%  not 8.7%) would prevent sellers from having to pay a Paypal or credit surcharge on money they didn't even get.  That would BENEFIT sellers.  But your incorrect math the way you frame it is again misleading. Since this  is all about letting states be able to collect taxes that people have not been paying under each states already exiting laws (it's known as TAX EVASION)  it's troubling to see you claim  "job loss, fraud, and devastating impact" of making tax evaders pay what they owe. Nobody likes taxes, but nobody REALLY LIKES have to to pay taxes to make up for the people who aren't paying theirs.
On May 15, 2013 A Patriot said
I think it is pretty obvious that the above comments in support of the act are made by people who are profiting from it.  And I want to thank them for accidentally revealing how the bill is even WORSE than previously discussed in the glowing media coverage this "state's rights" act has recieved to date. Surcharges on customers will benefit retailers?  That is the kind of insane talk that would get you thrown out of a retail outlet. Buying an American dime from China? More absurdity. Talk about a canard.  The fact is Chinese internet retailers are growing by leaps and bounds daily thanks to virtually free shipping granted to Chinese packages that cross the border.  For an item that costs $2 for an American retailer to ship inside the US, the Chinese pay three cents.  The service is granted to them with delivery confirmation and lighting fast ship times.  It is called e-Packet and just started.  This is all part of a bigger plan to devestate American online retailers.  No taxes will be charged or collected by Chinese retailers, handing them an 8% retail price advantage on average.  8% is the average profit margin of a SUCCESSFUL retail operation. So you can see what they intend to result from this act.

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