Online Sales Tax Bill Seen as Rife With Unintended Consequences

Bill needs more thought before being sent to the Senate floor, lawmakers and officials say

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Lawmakers as well as officials from the retirement planning and securities industries are coming out against an online financial transaction tax bill that they say would hurt retirement savers, small businesses and investors.

The bill, the Marketplace Fairness Act (S. 743), introduced April 16 by Sens. Richard Durbin, D-Ill., Lamar Alexander, R-Tenn., and Heidi Heitcamp, D-N.D., says it seeks to “restore states’ sovereign rights to enforce state and local sales and use tax laws,” among other purposes.

“This legislation does not create new or increase existing taxes,” said Heitcamp, in a statement. “It simply would give states the right, if they want, to collect state and local sales and use taxes on Internet purchases that they are already owed,” which she said amounts to about $23 billion annually. This money, Heitcamp said, would help states “balance their budgets without cutting services or increasing taxes.”

President Barack Obama is a champion of the bill. The White House released a statement Monday that said the measure would “level the playing field for local small business retailers that are in competition every day with large out-of-state online companies.”

But Brian Graff, executive director and CEO of the American Society of Pension Professionals and Actuaries (ASPPA), says the legislation, in its current form, would allow states to impose the tax on American workers’ 401(k) contributions and other transactions within workers' accounts.

ASPPA estimates that more than 70 million workers could be affected since most transactions within these plans now take place over the Internet.

“A financial transaction tax on 401(k) contributions and accounts could significantly reduce workers savings over time, threatening their retirement security,” Graff said. “A clear exception for such transactions is needed.”

ASPPA said the legislation should first be referred to the Senate Finance Committee before being considered on the Senate floor as it’s rife with “unintended consequences.”

Sen. Max Baucus, D-Mont.Indeed, Senate Finance Committee Chairman Max Baucus, D-Mont. (left), said Monday that the bill was “not ready for debate on the Senate floor”—which is supposed to occur this week—as it “has not been completely thought through” and “is full of unintended consequences that could seriously harm America’s small businesses.”

While supporters of the Marketplace Fairness Act claim the bill would “level the playing field between Main Street businesses and the out-of-state businesses by forcing both to collect sales taxes from customers,” Baucus argued that the reality is that the legislation “is anything but fair to America’s small businesses.”

Instead of helping businesses expand and grow and hire more employees, Baucus said the bill “forces small businesses to hire expensive lawyers and accountants to deal with the burdensome paperwork and added complexity of tax rules and filings across multiple states.”

The acting president and CEO of the Securities Industry and Financial Markets Association, Ken Bentsen, argued in a Monday statement that “the impact of the legislation on trade in services has not been adequately explored by Congress.” He said the bill “could lead to unexpected costs being passed on to consumers of financial services,” including sales taxes on services or state-level stock transaction taxes.

“We continue to oppose any kind of financial transaction tax as they are, essentially, a sales tax on investors,” Bentsen said. “Such levies are simply passed onto ordinary retail investors and retirees, reducing the incentive to save, and distorting capital markets.”

Before moving forward, Bentsen said that Congress should first hold hearings on the impact of the legislation “on the national market for trade in services, including financial services.”

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