The Senate's $100 Billion-Plus Deception

NEW YORK ( TheStreet) -- The impending and benignly labeled Senate bill, The Marketplace Fairness Act of 2013, is in reality a deceptive Trojan Horse. On May 6 it opens the gate for literally an entire army of barbarians to start looting you (assuming the house passes a parallel bill). The bill itself is fairly straightforward and readable, but the deception level used by its supporters is unprecedented.

It's extremely costly and unfair to you and terrible for America. It benefits only a select group of very large and tiny retailers (its supporters) and money-grubbing state legislators, at your expense.

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BIG BROTHER LOOMS

Using software, it turns your state into a form of tax collector for 9600 tax jurisdictions that'll soon tax you as they choose; taxation without representation. States can extend sales taxes to every U.S. industry, raise tax rates, and states like California, America's income tax vampire, will likely come after your income as well. It takes us one giant step towards Europe's problems and VAT.

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They're selling it as the "Internet sales tax bill", a deception itself. Nowhere does the bill mention the "Internet" or "ecommerce" ( read it). More of the initial $23 billion-plus it is estimated by its senate sponsor to cost you comes from mail order sales. Pretending to go after online retailers, the bill really goes after, and is bad for, U.S. manufacturing. But, it does so much more by changing the way states can tax. There will be a huge political cost to pay by supporters when consumers wake up to find 9600 U.S. tax jurisdictions looting them.

WHAT IT DOES

When you buy from a vendor in your state you typically pay sales tax (in all but a few states like Oregon, that don't charge it) but not when you buy from an out-of-state vendor. It's been this way as long as you can remember--maybe all your life. The bill allows states to make out-of-state businesses tax you for them, costing you materially over time.

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More importantly, it creates a kind of union among states to act as tax collectors for each other. California taxes for Nevada in reciprocity for Nevada taxing for California. Initially it only targets two small industries, but like every form of newly-introduced tax ever fashioned, the tools and legislation over time can be extended by the states to every U.S. industry and your business tax income.

Backers say even though nobody's ever paid sales taxes on out-of-state purchases, state laws require it, even though the Supreme Court in 1992 ruled such laws unconstitutional in Quill Corp. vs. North Dakota. And, states have always collected fees from local businesses for "tax exempt resale certificates" mandating only businesses with a physical presence in a state to tax residents. It appears the states, having had their cake, now want to eat several bigger ones at your expense.

Supporters have the audacity to claim it's not a huge tax increase when it's really more like they're creating a new tax and almost certainly thousands of new taxes in the future by allowing states to enforce laws they never could before.

HOW BIG BROTHER DOES IT

While it lets states tax all industries, legislators have singled out only mail and Internet businesses to enforce initially. It requires states to give free software to businesses that calculate tax on point-of-sale transactions for the 9600 different tax jurisdictions that will be charging you tax. As if drafters of the "Marketplace Fairness Act of 2013" think that's fair to you or those businesses.

But it will be easy for states to extend enforcement to all other industries by creating software for each industry. There won't be anything stopping them. No new federal legislation will be required for any state to tax you on any good or service it wants to. And because service is the biggest chunk of GDP, that's where the money is. The bill's senate proponents are so confident of its passage, note that Big Brother already has 6 "Certified Software Developers" spending money, at work on it.

Today, states exempt many industries from sales tax because taxing them isn't popular in the state. Eventually money-grubbing state legislators will likely eliminate many of these exemptions to get at your out-of-state money.

Any currently exempt industry that might generate lots of out-of-state tax is at risk. State legislators foam at the mouth at the thought of gouging out-of-state purchasers who can't vote them out of office. This is taxation without representation. Your option will be to buy elsewhere and be gouged by money-hungry legislators of other states.

The initial $23 billion they're after is chump change -- just like the original federal income tax was supposedly permanently capped at 2%. As states enforce taxation on more industries the bill could easily cost taxpayers endlessly more than $100 billion annually. Internet and mail order sales are a small fraction of our economy. Again, ours is primarily a service economy and the bill lets states tax you on services from their state. And that is precisely the basis of a European-style VAT.

Taxes on services and income is the ultimate Trojan Horse. Once states start accepting each other's tax claims against you, nothing stops them from coming after your business income. Scary!

It would initially cost the average adult about $100 a year, but eventually could cost endlessly over your lifetime, either in taxes on you, or price increases businesses will pass to you.

THE FALSE REASONING FOR IT

Supporters falsely claim out-of-state "Internet" sellers have an unfair price advantage over small local stores who must charge tax. In fact, accounting for size, online sellers pay more than local stores for the products they sell you; they actually have a price disadvantage.Small online sellers can't hold product like small local stores and routinely pay drop ship fees. Larger online vendors can level the playing field by holding inventory. But, unlike local sellers, they lack stores that generate sales to pay the cost to stock inventory. Online sellers pay more for product and must net-charge shipping, but without the cost of stores.

This often allows online retailers to offer you products at lower prices than stores do. Higher product prices plus shipping cost are often less than the costs local stores pass you. But even small retail stores can offer you lower prices online and have a price advantage selling out of state. This bill essentially asks taxpayers to pay retailers for the cost of their stores which generate them sales. It's more having cake and eating it too.

IT REALLY BENEFITS THE BIG RETAILERS

The argument is a distraction/deception from the fact the bill actually benefits the jumbo retailers like Wal-Mart ( WMT) and Amazon ( AMZN) (its biggest supporters) as well as tiny retailers, at the expense of medium-size retailers (both online and brick-and-mortar retailers). It exempts those with out-of-state sales below $1mm from collecting taxes. But, it forces medium-sized vendors to raise prices by taxing out-of-state sales. Huge retailers benefit by becoming more competitive; they tax you now, or will soon, because they're in, or will be in, most states.

The very largest retailers, like Amazon, Walmart and Target ( TGT), already have a huge price advantage because they can squeeze manufacturers and buy product in huge volume well below standard wholesale pricing. Only a small group of the very largest retailers, like Walmart and Amazon, can buy tens of thousands or even hundreds of thousands of products in the kind of volume needed to get best pricing, creating a kind of oligopoly on best pricing in retailing. Once you fathom Amazon and Walmart as the bill's leading behind-the-scene proponents you are immediately skeptical about its fairness claim.

AND IT'S BAD FOR THE COUNTRY

Only medium-sized retailers can even think about competing on pricing with the huge retailers--and higher taxes on you will hurt that. There's no doubt the bill intends to benefit the very largest retailers, both brick and online, at the expense of competition. It's bad for competition. If you believe in broad competition and Adam Smith's invisible hand, you disbelieve in this bill.

Service will be the differentiator online and that means delivery speed. Amazon has set up distribution facilities to have the fastest delivery. By locking in best pricing for Amazon, which already has the Internet's fastest delivery, the bill essentially hands Amazon a kind of future online speed monopoly other huge retailers will find hard to catch.

While pretending to go after online retailers, big or small, it actually hurts U.S. manufacturing more. Senators probably haven't read to page 16 of the estimates behind the bill and may be surprised to hear 65% of ecommerce sales are generated by manufacturers ( read it). The bill is bad for US manufacturing! Can that be good?

SENATORS LETTING STATE SPENDING RUN RAMPANT

By duping Senate Republicans into voting on the bill, Harry Reid has masterminded a no-win situation for them. Any Republican Senator who votes for the bill will face backlash come election day from every consumer with a brain--because they've been gouged. These Republican Senators will be benefiting state legislators and a very small group of tiny and huge retailers at the expense of manufacturers, mid-sized retailers and consumers in their state.

Total federal, state, and local government spending has crept to about 40% of GDP and it's outright scary. Federal spending is just over half that. Rapidly growing state and local spending seemingly has no end. It crowds out private industry, causing the poor job growth and economy we have. Any doubters are well reminded of Spain's 27% unemployment rate.

Any senator considering voting for this massive tax hike can't truthfully claim to be conservative; potentially endless government spending like this is something you'd expect from liberal European socialists. It's one giant step closer to Europe's problems and VAT.This bill actually benefits very few. It's bad for everyone else, bad for America and it's certainly bad for you.

--Written by Clay and Ken Fisher.

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