Supporters of the Internet sales tax continue to pitch it as a "fairness" issue - but experts say the tax would do costly damage to our economic recovery.
The Internet sales tax would allow states to make online retailers collect taxes on purchases. It would replace a 1992 Supreme Court decision that said a state can't force a retailer to collect sales tax unless the retailer has a physical presence in the state.
State and local governments support the bill, claiming they are losing tax revenue under the current system. Several big-box merchants, brick-and-mortar stores, and mom-and-pop shops back the bill, arguing online retailers have an unfair price advantage.
But Illinois Policy Institute's Ted Dabrowski told FOX Business Network's "Varney & Co." this tax wouldn't achieve any of its promises.
"Anybody who tries to pitch this new tax as a fairness tax is not telling the truth," said Dabrowski. "What this really is is a money grab. It's a money grab by states like Illinois, New York, California who don't manage their own budgets and are not fiscally responsible. And it's another Obama tax on the middle class, it's another tax on entrepreneurs, and it's just the wrong thing for our country. It's a job killer."
Dabrowski told host Stuart Varney that Illinois tried taxing the Internet retailers two years ago, but it was a "failure." Dabrowski said the state government expected the tax to raise $150 million, but after three months had only collected $3 million.
That's because online retailers left the state to avoid the tax and set up shop in more business-friendly states. The smaller online retailers had to shut down because of the added expense.
The bill probably sounds familiar. A similar one made the rounds in 2012, but expired.
Now it's on the fast track to get passed, thanks to persistence by Sen. Harry Reid (D-NV).
According to a letter sent to Reid from seven U.S. senators, Reid used a procedural maneuver to avoid the typical committee process and rush the Senate's vote on the bill, known as the Marketplace Fairness Act.
It passed a test vote Wednesday 74-23, and could come up for a final vote as early as today (Thursday).
Internet Sales Tax Sets a Dangerous Precedent
Tax-averse Republicans oppose the measure. Staunch conservatives see the bill as an expansion of state taxing authority and an excessive weight on small businesses.
Several influential anti-tax advocacy groups in Washington are feverishly vying to block passage as congressional opposition to the Internet sales tax is falling. In Wednesday's test vote, 27 Republicans voted in favor of the bill.
Grover Norquist, president of American for Tax Reform, cautions the bill would set a "precedent for further expansions of state-level tax collection authority." He maintains "money-hungry state legislators" are behind the bill.
Challengers maintain the bill would set a dangerous precedent and undermines the limits of the Commerce Clause, which states "Under current Supreme Court precedent, in the absence of a sufficient nexus, a state cannot reach beyond its borders to compel out-of-state Internet vendors to collect taxes on a particular transaction."
Setting such a precedent would lead the nation down "a dangerous path," according to Sen. Ron Wyden (D-OR).
Wyden argued that once states enforce tax laws in other states, what's to stop other government bodies from enforcing other rules across their boundaries.
On the Senate floor Monday he likened it to "China telling American firms to enforce China's censorship practices."
Business Speak Out Against Sales Tax
An Internet sales tax would unduly tax our slowly recovering economy.
Consumers, who are just growing more comfortable spending more, will spend less on online purchases if they are taxed. Slowing e-commerce sales would result in job losses across a plethora of professions and myriad industries. It would also curb free enterprise.
Wyden told his colleagues the bill comes at a time when Congress should be encouraging innovation and entrepreneurial risk-taking.
eBay Inc. (Nasdaq: EBAY) President John Donahue recently wrote in an open letter that the bill will thwart business growth for thousands of online retailers.
For consumers, Donahue explained, the impact means "more out of pocket when you shop online from your favorite seller and small business shop owners."
For small business sellers, it means increased costs in administration and paperwork to collect sales taxes from the more than 9,600 tax jurisdictions across the U.S. It also subjects small business sellers to possible audits by out of state tax collectors.
"Make no mistake, the current bills penalizes small online businesses. Those fighting for this change refuse to acknowledge that the burden on businesses like yours is far greater than for a big national retailer. It may harm your ability to grow, and costs jobs, including yours," Donahue wrote.
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