Washington has had its eye on the Internet for good while now. I can’t help but imagine the Eye of Sauron gazing from Mordor looking for the right time to strike. It appears that that time is getting ever closer. This week two bills are working their way through Washington that could vastly change our experience on the Internet. Both of these bills are mildly complicated so bear with me.

The first is a bill called CISPA, or the Cyber Intelligence Sharing and Protection Act. This bill was defeated last year, but like all bad ideas, its back and this time with $84 million in lobbying efforts behind it.In addition to the law being vaguely worded; the media hasn’t given it much coverage. Rep. Mike Rogers, Republican from Michigan, claims that there are significant threats of cyber-attack and we need to find “that right balance between our privacy, civil liberties, and stopping bad guys in their tracks from ruining what is one-sixth of the US economy.” The funny thing is that CISPA will ruin our privacy and civil liberties and they’ve drafted a whole other bill that will ruin that portion of the economy that he wants to protect.Lets see what Congressman Rogers means by “balance”. Under CISPA private businesses and organizations are allowed to share information with the government and even other private businesses. The Electronic Frontier Foundation and the ACLU say that the information includes health records, credit information, content of communications, email addresses, location data, and contact information. In addition, Internet use records that could reflect intensely private information like what people read, where they go, how they worship, the political organizations they belong to and other information without first being scrubbed of personally identifiable information. All of this with no warrants needed by the government and no legal repercussions to companies. By “balance” he must mean completely unrestricted spying on American citizens by both public and private organizations. Is the Patriot Act not enough for these people? Do they really feel the need to bring corporations in on the spying too? I suppose since the 4th Amendment doesn’t mention the Internet it couldn’t possibly apply to it. Much in the same way the 2nd Amendment only applies to muskets.President Obama has threatened to veto the bill because he has some reservations about its intrusion into Internet privacy. Only, its hard to believe a veto threat when he willingly extended the Patriot Act and signed the 2012 NDAA. I’m sure President Obama will pinky swear that he won’t allow government agencies to abuse this power and data-mine all the information they could squeeze out of private businesses and internet companies. CISPA has passed the House, but the word on the streets is that CISPA is dead on arrival in the Senate. Here’s hoping that’s true. Even if it is, I’m sure it will come back.

Now on to ruining one-sixth of our economy. The Marketplace Fairness Act is also making its way through the Washington. Right now we don’t pay sales tax on many of the purchases we make online. That has to do with the different ways states handle sales taxes and the fact that many online purchases occur across state lines. Supporters say this gives online retailers an unfair advantage at the expense of physical stores.

About.com has this to say about the how taxes are handled on the internet right now:

“Many times you won’t be charged sales taxes when you purchase items online, but this doesn’t mean that you don’t owe tax on the purchase.  Most online retailers only charge sales tax in certain states because of a concept called Nexus.  This federal precedent only requires retailers to collect sales taxes in states where they have a physical presence. However, consumers are technically supposed to report these purchases on their state income tax return and pay the sales taxes at that time.”

“Most states have a destination-based sales tax, which means that the sale is thought to take place in the jurisdiction where the product is ultimately used (where it’s shipped to or picked up from).  A few states have an origin-based sales tax, which means the sale is considered to take place at the location where the sale is completed (the seller’s business location).  If you were running a business in a origin state, all sales you make would be taxable in that state.

However, if you were running a business in a destination state, you would not have to collect sales taxes on sales that are shipped out-of-state.  You would also not have to collect sales taxes for the customer’s state unless you have Nexus, or a physical presence, in that state.  The customer would simply pay those sales/use taxes on their own.”

The answer to all this? Allow state governments to impose their tax laws on businesses outside their borders. You heard me right. If I am the owner of an online retail store I have to comply with all the tax laws of every state and tax jurisdiction I sell to (there are 9,600 in the US).

Small businesses already have it bad nowadays. We can’t afford to place more hurdles in front of entrepreneurs. The law wouldn’t apply to online stores that have sales under $1 million, but that’s not that high of a threshold and many businesses operate on thin profit margins to begin with. Goodbye small businesses; hello mega corporations. This is a great law if you hate competition. Most companies will not just absorb these extra taxes. Prices will rise (this is actually the intent of the law) and we all will suffer the consequences, especially the poor and middle class that take advantage of online prices.

Besides the bill being a lazy attempt at money grabbing this would be a legalization of taxation without representation. What authority should one state have over a business in another state? The answer should be none. Politicians think that because a business sells products on a website that they should be taxed by another state? What representation does a company have in another state’s government? None. The members of that business can’t vote for or lobby a representative to look after their interests, but taxes can be levied against them? We fought a revolutionary war over this kind if thing.

Perhaps the worst part is that this will feed and grow the government on both the federal and state level. Imagine the increase in bureaucracy needed to administer a law like this. Internet purchases will need to be tracked and state governments will need to reach out to and audit businesses in other states to ensure that that are coughing up the right amount of taxes. Businesses will have to submit to the authorities of numerous states and God help them if they happened to not comply with every law and tax the states can throw at them. If we don’t want to ruin this portion of the economy then we shouldn’t create a wild west typhoon of tax laws for them to comply with.

The root of the issue seems to be the odd way most states have taken a destination-based approach to sales tax. Why would you exempt businesses in your state from collecting sales taxes on items is sells out of state? Should brick and mortar stores not charge sales taxes to customers that are citizens of a different state? If this is such a problem, then states should adopt sensible tax policy that will encourage businesses to locate in their state and then apply the same taxes to any business, online or physical. But, nope, we can’t do that. We have attack business’ with the a tax system that would be impossible to comply with.

The truly sad part is that the Marketplace Fairness Act has appeared to gain bipartisan support; probably enough to get it passed. To vote for this bill is to support new taxes and a bigger government that gives states the ability to invade each other. I don’t think that’s exactly what states rights is all about. It’s a double whammy against any Republican that supports it and there are many that do.

For instance, Senator Boozman of Arkansas is a cosponsor of the bill. I wrote his office an email asking him to oppose the bill. Here is part of the response I received.

“[R]emote sellers (companies that do business in states where they do not have a physical presence) were not compelled to collect and remit use taxes, in part because of the complexities involved with that process. However, with new technology that is now available, there has been a push by several states to begin collecting these taxes. Moreover, we have seen thousands of Main Street businesses operate at a significant competitive disadvantage because they have to collect taxes and online sellers do not.”

“I am a firm believer in states’ rights and this bill would give states the ability to enforce their own laws and collect the sales and use taxes that are already owed. This is not a new tax.”

“I would not have supported this legislation 10 years ago when online shopping was just getting started. However, as you know, online shopping has grown exponentially since then and I am extremely concerned about our small businesses in Arkansas. The average state and local sales tax rate in Arkansas is 8.5%, the 7th highest rate in the nation. How can a small retailer on Main Street compete with a remote retailer when they automatically start out 8.5% behind? It is only fair that we provide all of our businesses, whether on Main Street or the Internet, a level playing field on which to compete”.If you don’t give it much thought, Senator Boozman’s reasoning seems sound… if you don’t give it any thought. It won’t hold up against any serious or principled analysis. I thought Republicans were against more taxes and bigger government. Oh well, at least it makes a nice slogan.

Both of these bills are perfect examples of the heavy handed tactics government often prefers over smart policy. Perceived cyber-security threat? Allow everyone to spy on American citizens. Perceived imbalance in the tax code? Allow every state to tax businesses in every other state. It seems no matter what the government does or wants to do, the American people lose.

Live Free.

Taxation without representation: http://www.freedomworks.org/blog/kristina-ribali/the-freedomcast-episode-30-the-marketplace-fairnes?source=FWFBFreedomCastEp30MarketplaceFairnessAct
ACLU CISPA info: http://www.aclu.org/files/assets/aclu_letter_to_congress_urging_no_vote_on_h.r._624_cispa_-_4.15.13.pdf
CISPA dead in the Senate: http://reason.com/blog/2013/04/25/cispa-doa-in-the-senate-for-now
The Marketplace Fairness Act: http://heritageaction.com/2013/04/10-awful-things-about-the-internet-sales-tax/
Jim Demint on The Marketplace Fairness Act: http://online.wsj.com/article/SB10000872396390444226904577559414267708728.html
About current Internet sales taxes: http://taxes.about.com/od/statetaxes/a/sales-tax-myths.htm