Internet businesses, taxes, & Senator Mitch McConnell


In late April, Senate Minority Leader Mitch McConnell (R-KY) spoke against the Marketplace Fairness Act. The Senator’s comments – seen in full here – deserve both criticism and praise for philosophically sound positions and an awareness of the complexity of America’s various tax codes mixed in with factually inaccurate assessments of the Act.

First, where the Senator was correct. As part of his statement, Senator McConnell said there are “there are nearly 10,000 state, local and municipal tax codes nationwide.”

Glenn Kessler examined this at The Fact Checker, and found the following:

McConnell’s office said he got the figure from a report by the Tax Foundation, which said that “several private firms maintain databases of the sales tax rates in the 9,600 local jurisdictions in the United States that levy them.”

Joseph D. Henchman, vice president of legal and state projects at the Tax Foundation, said the actual figure is 9,646, as of July 2011. He said that Vertex, Inc., a sales tax software provider, calculated the figure at the Tax Foundation’s request.

The Vertex estimate is in the mainstream for such estimates. Avalara, another software specialist, gives an estimate of 14,500, while CCH calculates it as 7,600.

Kessler spells out why this system is so complex:

The numbers add up quickly because all but five states have sales taxes, and these then can be layered with county, city and/or district sales taxes. In 2012, Vertex says, 259 tax jurisdictions either increased or decreased their rates, while 167 new tax districts were created.

“The number is not easily verifiable,” she said, noting the wide ranges of estimates. “But 9,600 is probably a good average.” She said the figure refers to the number of “tax authorities that have the right and the ability to impose a tax with a rate.”

So far, the Senator is right on, and his comments are significant additions to the effort to simplify and reform the tax code.

However, Kessler also notes a senior member of a lobbying group supporting the Marketplace Fairness Act says the Act would actually simplify some tax laws, providing some pushback against Senator McConnell’s comments:

Whether the crazy-quilt of tax jurisdictions is “a burden” is open to interpretation. David French, senior vice president of government relations at the National Retail Federation, which is pushing hard for a new law, said that “it is true that there are roughly 9,600 taxing jurisdictions, but the Marketplace Fairness Act contains several provisions to simplify compliance for remote sellers.”

While French’s comments obviously have an inherent bias in them, he is right that the Act does not add new taxes. In this way, Senator McConnell’s comments are incorrect. There is no imposition of “new” taxes, though the spokesman for Senator Mike Enzi (R-WY), the primary sponsor of the Act, told Tea Party Patriots that most of the legally-required taxes are not collected or paid. So the Senator’s point about an increased burden on businesses is correct, even if “new” taxes are not added.

Unfortunately, much of the rest of Senator McConnell’s statement rests on an inaccuracy. From his statement:

“If states decide they need this revenue, they should keep in mind the tremendous burden they’ll be placing on the little guys who do so much to drive this economy. In my view, the federal government should be looking for ways to help, not hurt, these folks.

“Let’s be honest: the big guys can take care of themselves. Let’s not make it even harder for their smaller competitors.”

Head informed Tea Party Patriots that the Act actually provides protections for smaller businesses:

The bill provides small businesses with a $1,000,000 exemption. That means a business only has to start collecting the sales tax when they have more than $1 million in online sales. States are also required to provide free software and services to the business for the collection and remittance to the states. This is to make sure there isn’t a cost to businesses. This bill also puts Main Street businesses on a level playing field with their out-of-state and online counterparts that are selling to customers but are able to offer lower prices because they are not collecting the sales tax. This puts local businesses at a disadvantage.

In short, Head is arguing that smaller businesses could be helped with this legislation because of current cost differentials and a tax exemption. As Tea Party Patriots pointed out last week, this argument has a number of significant holes in it, but it is accurate to say small businesses will be relatively better off than their larger competitors in certain ways.

Tea Party Patriots reached out to Senator McConnell’s office for clarification on the tax exemption point, but as of press time his office had not responded.

As is typical with a politician’s statement, there is much to like and dislike in what Senator McConnell said. On the one hand, he has highlighted the absurdly complex tax codes in America, and thus how simplification is absolutely necessary. He also stands against a flawed bill.

Unfortunately, his opposition is partially based upon an inaccurate assessment of the Marketplace Fairness Act. While his opposition is appreciated, and is the right position to take, his ignorance on certain facts is harmful to the movement to take down the Act.