How Online “Marketplace Fairness Act” Could Tax Your 401(k)

by John Berlau on May 6, 2013 · 9 comments

in Economy, Legal, Nanny State, Personal Liberty, Regulation, Trade

Today, the Senate likely will pass the Marketplace Fairness Act, which would force online retailers to collect sales taxes for states in which purchasers reside. Most have heard how this will hit us when we purchase goods over the Internet. But a lesser-known problem is the legislation also would enable states to levy new taxes on 401(k) and other savings vehicles.

How? The bill authorizes states to “require all sellers not qualifying for the small seller exception [$1 million in sales or less] to collect and remit sales and use taxes with respect to remote sales sourced to that Member State.” Yet “sellers” and “sales” are never specifically defined, and there are no specific exemptions for certain types of products or services.

Financial experts say this means states tax “sales” such as stock trades in a mutual fund or brokerage account, or even contributions to pension plans such as 401(k)s that were designed to be tax-free until retirement.

The American Society of Pension Professionals and Actuaries, a group of more than 11,000 retirement plan and benefits professionals, warns the bill “would allow states to impose a financial transaction tax that would apply to American workers’ 401(k) contributions and other transactions within worker’s accounts.” The group notes that “over 70 million workers could be affected” by such taxes, which “could significantly reduce workers savings over time, threatening their retirement security.” The group calls for “a clear exception” for transactions within a 401(k) account.

Yet this is not the only financial service the bill could enable states to tax, experts say. Grover Norquist of Americans for Tax Reform asks in a letter to Sen. Mike Enzi, R-Wyo., a chief GOP proponent of the legislation, “Will financial products that are sold over the Internet, such as portfolio management services, credit reporting service apps, or insurance service, fall under MFA taxation authority?”

The Securities Industry and Financial Markets Association (SIFMA), representing securities firms and asset managers,  issued a statement urging hearings  on the MFA’s impact on financial services. As written, “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,” the group said.

Similarly, the Financial Services Roundtable, which represents banks, insurance companies and brokerage firms, states these concerns: “A transaction tax on financial services products will hurt retail investors, retired Americans, and small businesses, effectively making it more expensive for them to invest and plan for the long-term. Without hearings, these implications and others will not be properly addressed.”

These potential scenarios, taken seriously by financial policy experts, illustrate the inherent problem of the bill. Forcing a business without any physical presence in a state to tax that state’s consumers is taxation without representation. As my colleague Jessica Melugin, an adjunct fellow at the Competitive Enterprise Institute, has written, “This bill would undermine that federalist principle by allowing one state to reach into the borders of another and tax businesses that have no political voice in the taxing state.”

As Melugin concludes in a Washington Times op-ed, state sovereignty does not just mean protection from the interference of the federal government. It also means freedom from encroachment of other states. “The legislation does away with the crucial notion that one state’s sovereignty stops where another state’s begins,” she writes. ”Under this cartel, state tax laws extend everywhere commerce happens on the Internet.”

And as we are just now finding out, that “everywhere” could include your 401(k) account, individual retirement account, and mutual fund. So to borrow a phrase from investing, the House needs to undertake some much-needed due diligence on this bill, rather than rusbhing it through as the s0-called upper chamber likely will do.

Lauren Stephens May 7, 2013 at 9:10 am

Are you kidding me? Stop spreading misinformation and scaring people. READ THE BILL! The bill makes clear that the ONLY thing that would be created by it is that member states (not ALL states) will now have the option to collect the prevailing sales tax. It specifically states that NO new taxes or fees can be created or collected from this.

John Berlau May 7, 2013 at 9:39 pm

Laura,

Have indeed read the bill. And it places no limits on the products or services that states can include in their sales taxes that they would now have the power to force remote sellers to collect. Thus if a state wished to add, say, stock trades to the “sales” currently taxed in the state, it would have the power to impose the obligation to collect on out-0f-state sellers dealing with state residents.

That’s not just my interpretation. As noted in the post, concerns about state-level financial transaction taxes have been raised by the Financial Services Roundtable. the Securities Industry and Financial Markets Association, and the American Society of Pension Professionals and Actuaries.

Joshua Van Dyke May 9, 2013 at 8:00 am

I’m not a financial expert by any means, my reaction to this if Oregon started collecting taxes on my 401 and 403 retirement accounts is to immediatly stop all contributions and reserve the monies into a savings account where I periodically purchase precious metals. It would be the way of this already over-taxed citizen to wave my (middle) finger to the feds and state governments who are bent on NOT keeping mine (or anyone except their own) best interests at heart. My 2 cents worth.
-Joshua

John Berlau May 9, 2013 at 12:57 pm

Joshua,

Unfortunately, under the bill that passed the Senate, Oregon could also force your precious metals dealer to collect taxes from you and remit to the state coffers. Let’s hope this gets more scrutiny in the House.

David Campbell May 10, 2013 at 8:31 pm

No state imposes sales tax on financial transactions.
Since states do not currently tax financial transactions there is absolutely nothing in the bill that would increase the likelihood that any state will start imposing sales taxes on those transactions.
This article is pure fear-mongering!

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