FedUpUSA

So now the battle is joined.

The Senate has passed, sending to The House, a bill that would impose a requirement that online merchants submit to state tax collection in states where they have no physical presence.

To try to make this more palatable they are exempting businesses with less than $1 million in annual sales, but this doesn’t matter when you get down to brass tacks.

Amazon, WalMart and other large retailers with online presence are supporting this move.  This sounds insane, but it in fact is not — it is yet another attempt to destroy their competition using the jackboot of government rather than through free and open competition.

In the 1990s when I ran MCSNet we wanted to open an office in Wisconsin to serve Milwaukee business and residential customers.  There was an easy way to handle residential dial-in customers through what amounted to a “virtual POP” but doing so for business users was far more difficult as at the time the technology to do so at a reasonable cost was not “fully baked.”  If we wanted to implement our Cheapernet T1 service, for example, we neededequipment in leased physical space in-state.  This meant that we had our name on space and our own hardware present in the location, which under long-standing law created nexus.

Nexus is the principle of “ties” or “activity” in a given location; for a business it is important as it triggers the requirement to comply with state and local tax requirements.  In short, it brings you under the jurisdiction of that state.  During the 1990s we had received several “demand letters” from both New York and California insisting that we “give” their sales tax authorities data dumps of everything we had sold to entities in both states.  We had responded with “Bite Me!” to these demands several times; at one point I actually photocopied my butt-cheeks and sent that back in one of their demand letter reply envelopes.  Both states were on fishing expeditions; as a Chicago-area ISP we did not do a material amount of business with people in either state, and only physical sales of property would have been taxable anyway.  Nonetheless they were actually trying to audit us!  It was a pure harassment tactic but lacking jurisdiction there was nothing either state could do to force us to comply.

Wisconsin was a different matter since we wanted to conduct business there.  I investigated setting up a separate corporation to run that location and then engage in a business transaction with this “captive entity” such that the Wisconsin-registered corporation would show no net profit.  The idea here was to evade the “nexus” that would otherwise attach to MCSNet in Wisconsin, thereby evading the requirement to register in the state and expose ourselves to the Wisconsin tax authorities.

Before you start screaming “you dirty tax evader!” please realize something — MCSNet’s primary business was the sale of services that were not subject to sales tax.  We sold very few tangible goods; as a percentage of sales you couldn’t find them.  The only reason we stocked and sold such goods was that it wasconvenient for customers, especially high-speed dedicated line business customers, to be able to order up service and get the hardware (along with warranty repairs or swap capability) from us.

The issue from my perspective was the pain in the ass factor from the sales tax auditors.  They were real jackasses, and showed up every couple of years to harass us.  I understand the reason for their audits, as once you register and start collecting tax you also have an exemption certificate; the goods you buy for resale are not taxed when you buy them — you collect the tax when you sell them to the customer and remit it.  This provides a tremendous incentive to cheat by abusing your tax certificate to buy things without paying the sales tax that you intend to, and do, consume internally.  The audits are performed for the purpose of catching this and nailing the violators, of which there are many.

But the fact remains these guys would show up and consume what often amounted to a full day of time and sometimes multiple days from some of my critical employees.  Being a relatively small business of about three dozen employees to have one of my key people tied up “at whim” by these guys who wanted to riffle though our purchase orders to and invoices from suppliers, pointing at a random shipped item (say, a router) and demanding to know exactly where Serial #302052 went (and proof that the tax was paid if it wasn’t sitting in our inventory, whether we paid it when we put it to use internally or we billed, collected and remitted the tax if we sold it to a customer) was a royal pain in the ass.

We never cheated on our state tax obligations and despite these audits not once were we tagged for a deficiency.  But I was going to be damned to Hell if I was going to intentionally expose ourselves to this crap coming from another state if I could legally avoid it.

The advice I got from our counsel was that I could try a scheme like I described where a “captive corporation” rented the space and owned the gear, then engaged in what amounted to a zero-profit transaction with us, but if I did so I was risking at best a civil suit from the tax authorities in Wisconsin and if someone up there got aggressive I might even get indicted.

I passed as the cost of getting sued would grossly exceed the cost of compliance, never mind the (small but present) risk of a criminal indictment, and just set the thing up.  As it turned out Wisconsin was more-reasonable than Illinois in regard to deciding to show up and harass us — they didn’t during the remainder of the time I ran the place.  We did our paperwork and remitted what we owed, and that was that.

Amazon, for its part, has engaged in this sort of screwball deal with its distribution centers in various states, arguing that this doesn’t give them nexus and thus they don’t need to collect tax.  When threatened they reply with the threat to close the center and fire the employees (who are residents of the subject state) or sue, which effectively stalls the clock.  This set of tactics has “worked”, because Amazon (and similar firms) are huge corporations with internal legal staffing that can fight these things and, at worst, delay the outcome driving up the costs for the states and there is virtually no chance that the company or its officers will be indicted by the states in question for tax evasion, as is the case for a small business.  The problem is that as these cases have gone on over the years it has become increasingly apparent that Amazon and these other retailers will eventually lose and be forced to both pay and collect the taxes and might be exposed to penalties, interest and retroactive tax billing for willful evasive activity.

So what Amazon appears to have decided to do is play screw the other guy by forcing them into having a “virtual” nexus that otherwise would not exist!  This is then sold to people as “fairness.”

It is nothing of the sort.

Amazon could choose to have distribution centers only in no-sales-tax states.  It could then tell the rest of the states to “pound sand.”  There is a long-standing US Supreme Court decision (“Quill”) that they can stand behind if they take this approach and are without question in the clear in doing so.  But by doing so Amazon would have a serious problem because transit time and cost become a big problem, and since everyone wants everything right now, shipping cost is a huge expense and getting larger, and Amazon sees both cutting that cost and increasing speed of delivery as a competitive advantage (it is) they want to open distribution centers close to the people who shop.

But that leaves them with a problem because to do that they create nexus, and with nexus comes compliance costs.  Since they’ve become increasingly unable to avoid this and meet their business goals they now seek to use the jackboot of government to shove it down their competitors’ throats!

That’s what this is about folks — audit and compliance costs.  It is not about “sales tax” per-se.  Those audit and compliance costs are a big problem and an open-ended channel of abuse from virtually every state.  Further, simply figuring out your liability accurately is a problem all on its own because there are not only state sales taxes in many states there are county and local overrides, leading to the need to accurately track and bill tax based on thousands of jurisdictions with rates that change on a pretty-frequent basis. The business selling on the Internet could easily find itself not only subject to something like 46State audits but also audits by counties and cities that impose “override” taxes, as many states allow.  This runs the number of potential audits into the hundreds or worse, all independent of one another, and forces said businesses to buy a service of some sort that can handle accurately tracking and computing the various rates in force in different places.

If you think these folks at the state sales tax audit departments won’t use this law to harass small businesses you’re dead wrong.  They will.  California and New York, in particular, are virtually certain to do so immediately — hell, they tried to force MCSNet to comply with their crap while we had no presence, no office, and sold essentially nothing into those states.  If they could have compelled MCSNet to show up in their state with our records for an audit they would have done exactly that.

This bill, if it passes into law, will impose that sort of crap on any business that both sells online and has more than $1m in revenue, which is in fact a pretty small number.  MCSNet passed that revenue number when we could still count our employees on my fingers.

Were I running MCSNet today and this bill were to pass I’d shut it down the next morning.  

It’s simply not worth it.

This isn’t about taxation — it’s about Amazon, WalMart and a handful of other large online retailers forcing others to bear compliance costs that they voluntarily assumed as a consequence of their business model and which these other firms have legally avoided through their business model.

When private enterprise starts using the guns of government goons to kill their competitors it’s time for those competitors to respond with this and go home:

I stared at this yesterday when it first hit my screen in disbelief.  They actually ran this crap?

While the most sweeping provisions of the health care overhaul have not yet gone into effect, plenty of Americans will still be paying higher insurance premiums this year — as insurance companies try to preemptively cover the cost of a tax increase included in President Obama’s Affordable Care Act.

That tax doesn’t take effect until next year, when other major provisions like the so-called “individual mandate” and insurance subsidies also kick in. But that hasn’t stopped insurance companies from charging higher premiums this year to cover the hike, as well as the cost of ObamaCare benefits such as free birth control and preventive care.

Premiums for individuals and small businesses are projected to increase due to the tax by roughly 2 percent this year and by as much as 3.7 percent in 2023, according to a widely cited analysis by the insurance industry.

2% and 3.7% eh?

Bah.

I have multiple reports of individual and small-group plan price hikes of 50, 60, 70, even 100% coming down this year and next.  Against that 2 or 3.7% is going to sound like a Girl Scout picnic.

The problem is that the “must-issue” and “community rating” provisions in the law are just more cost-shifting and promise to make everyone pay more, because they force everyone to buy — including those who otherwise would not.  Since there is no restraint on the services one consumes enforced by the size of your wallet there is no price feedback mechanism on the medical industry.

Couple that with the medical industry’s penchant to force the 330 million Americans to pay for the development of basically everything (because most of the rest of the world steals it, either directly or by threat and thus gets the technologies for reproduction cost) and you have an intractable problem.

Remember, Obama said that health insurance costs would go down with Obamacare.

So who’s have gone down?  Mine have gone up!  So has those of everyone who I know.  I have not found one person who, for like-for-like coverage, has seen costs go down, although I’m sure you will find some — for example, someone with AIDS who currently cannot afford to buy at all!

Obamacare was sold to the American public as a means of “controlling” runaway health costs.  It has done nothing of the sort; it has instead advanced that runaway, and yet we haven’t even felt the full brunt of the law yet.

This is where our budget problem comes from as well.  There are plenty of people in Washington who knows this, yet you should note that there is a stony silence when it comes to discussing the root of the problem or doing anything to fix it.

Once in a while you will hear someone holler that Health Insurance companies are “ripping people off.”  But that’s not true — look at Tenet, with a 5.6% return on assets and a 7.6% operating margin (gross) and profit margin of 0.33%, or Cardinal with a 1.78% operating margin (!) and a 1% profit margin.  Raping the consumer?  Don’t think so.

How about Merck?  Everyone hates Pharma, right?  Well, maybe you have a reason to — 23.4% operating margin and 14% net.  Or you could look at Pfizer, 31% operating margin and 15.6% net.

That’s pretty damned healthy.

But let’s assume you zeroed Pfizer’s net — that is, you simply stole it (e.g. by taxation.)  How much difference would it make to the Federal Government’s $850 billion in spending on health care last year?

Answer: About $6 billion, or well under 1%.

In other words, nothing.

That’s because the problem doesn’t lie there.  It lies in the cost-shifting, especially international cost-shifting.  It lies in the production of goods and servicesfor which there is no demand in the target markets at the market price, but there’s plenty of demand (and thus supply) at a cross-subsidized price.

It is not so simple to say “we’ll just tax the hell out of those Pharma folks!”  That will do nothing.  Likewise, you can’t squeeze the provider side; there’s nothing there to squeeze and blood does not flow from a stone.

So how do you get from here to where we need to go?

A couple of things have to happen — and happen now:

Cross-border cost-shifting must end immediately.  The current rubric is that we “must” let Canada, for example, have Viagra for $2/pill or “they will break patents.”  The answer is “tough cookies.”  We must prevent the use of the guns of government to allow these firms to wildly distort pricing across boundaries, whether state or national.

Were that to go away then anyone could buy Viagra for $2 and bring it here; the price in the US would collapse.  The makers of drugs and devices would argue that such will destroy the profit in these drugs and thus their development.

That’s only true if the price in the foreign nations remains artificially depressed!

What the drug and device companies argue is that these nations tell them that if they do not sell at “their” price then the nation will break their patents and the company will get nothing.  Rather than knuckle under to extortion our answer as a nation must be this:  You can do that, but if you do our development budget will go to zero, since we cannot recover our costs.  If you take this action anyway, knowing that to be the case, there will be nothing for you to steal since the products will not exist in the first place.

The same applies to cost-shifting within provision of services.  Juanita the illegal Mexican comes here 7 months pregnant, drug and alcohol addicted, and goes into labor.  She has no money and (of course) no insurance.  The hospital is required to treat her and her newborn in the NICU, running up a $2m bill which it has no means to collect.

Then you come along with an inflamed appendix and it costs $20,000 to have it removed because $18,000 of that charge is your forced share of Juanita’s care.  This is theft and it must stop right here and now — because if it doesn’t the entire damned system is going to collapse.

There is no other nation on the planet that allows this sort of financial rape of their citizens to take place.  We’re the only nation where it happens and we’re fools.  The Democrats demagogue this issue but so have the Republicans — EMTALA, which is the law that forced this business model on hospitals, was a Reagan thing.

Without EMTALA a hospital would have rely on charitable donations for such procedures, because if it attempted to enforce such a cost-shift otherwise you would (and could!) choose to go across town to a hospital that refused to do so.  You’d pay for your procedure there instead, and rather quickly the hospital that tried to force you to buy Juanita’s procedures would go out of business.

You would never accept a grocery store that charged you 10x as much as the next person in line because you looked like you had money but the person behind you did not.  This scam is performed every single day in our nation’s hospitals and it, along with the above, is inflating the cost of care by a factor of five to ten over what your medical care would otherwise cost.

The bleating over how medical care is “unaffordable” and thus “requires” government help is self-inflicted. Were these distortions to be removed you could pay for your surgery with a credit card — yeah, the financing costs would be high, but you could do it.  Or you could sell your fancy rims on your ride to cover the cost of your child’s birth.

This, my friends, is the root of our fiscal and competitiveness problem in America.

It is damn close to the entire budget issue that faces this nation at a Federal and State level.

We either fix it — and fix it now — or the rest of the debate about budgets and fiscal priorities simply will not make a damn bit of difference to the outcome.

That’s all I can give them on this one…

One tempting idea for saving money on Medicare, a program that vacuums up some 15 percent of federal spending, is to raise the age at which Americans become eligible for it. We ourselves have succumbed to this temptation, on more than one occasion.

Raising the eligibility age a couple of years, to 67, remains an attractive idea; it would save the program a lot of money. It’s just that there are a lot of other things Washington should try first.

“Should try”?  C’mon….

But Bloomberg does, at least, identify the issue with that sort of “recommendation”:

The problem is that such a change would do little to control overall health-care costs, which should be the ultimate goal of all health-care reform. If 65- and 66-year-olds can no longer receive Medicare, they would have to find other health insurance. Some would remain on their employer plans. Some would fall back on Medicaid. Some would join the people shopping for insurance on the state exchanges, perhaps qualifying for federal subsidies.

In other words total spending on health care might actually go up instead of down!  While the Federal Government would shed some of the budget impact it would simply be shifted.

This, at its core, is the flaw with all such “savings”; they aren’t savings.  They are simply shoving the check onto someone else’s table and then playing “dine-and-dash” so that the recipient of the game has no alternative but to pay.

Bloomberg goes on to claim other attempted “savings”, but the end result doesn’t change.  For example, they claim (and again use the usual fraudulent game of claiming 10 year “savings”) of $206 billion over four different policy changes.

But this is $20 billion, approximately, on an annual basis when we have a $1,200 billion annual deficit.

Worse, given the spend of $850 billion a year (all federal medical spending) in 2011 at the historical growth rate the Federal Government will spend $2,012 billion per year 10 years from now.  Suddenly that so-called $20 billion “savings” annually is only 1% of the total, and is utterly meaningless when it comes to the budgetary impact and what must be done.

This is only a partial list of strategies, but it illustrates the range of ideas for saving Medicare money. To preserve the program for future generations — and to help the federal government get its budget in order — Medicare’s costs will have to be reduced. At some point it may even be necessary to increase the eligibility age to help Medicare remain solvent. But not yet.

Nice sentiment eh?

Now where are the real program suggestions to achieve the goal?

Missing, that’s where, because you can’t get there from here by attacking the program and its operation.  The underlying problem is in the medical system and the monopoly protections it has in law as a whole, not medical “entitlement” spending.

This is very similar to the “gun control” debate arising from Sandy Hook; indeed, it is effectively identical in form and fashion.  It’s a diversion and a scam to avoid discussion and debate of where the problem lies.

Post Sandy Hook the discussion has all been about “Guns.”  The problem isn’t guns, exactly as the problem isn’t Medicare or Medicaid when it comes to “entitlement” spending.

The problem with “entitlement spending” is the medical system as a whole; it is the monopoly protections and cost-shifting that has led to the explosion in medical spending.

Here are several examples of what our current medical system produces:

• Juanita the illegal Mexican immigrant comes into the country 7 months pregnant with a history of alcohol and drug abuse.  She has never seen a doctor during her pregnancy.  She goes into labor 2 months premature and the baby requires both extreme levels of neonatal care and is permanently disabled.  In the United States this incident will be charged to you; the NICU bill alone could be over $2 million, and the permanent support costs for this child (who we deem a citizen) could easily hit another $2 million.  When you subsequently show up with an acute need to have your appendix removed the cost is $20,000 instead of $2,000, because the hospital must somehow cover the care it was forced to provide to Juanita and her newborn or it will go out of business.  In every other nation if you tried this you’d be lucky to not be deported before you could actually give birth and in no case would you be able to foist this expense off on the taxpayers.
• Canada tells Pfizer that it will only pay $2 per tablet for Viagra.  If Pfizer refuses to sell it for $2, then Canada will break Pfizer’s patents.  Pfizer accedes to this demand.  But in the United States Pfizer then amortizes the entire development cost of the drug on our backs, using the backing of the government to prohibit anyone from bringing the drug back into the US, even though it’s authentic and made in Pfizer plants, to protect the US price.  The result is that we wind up paying for the development of every new drug and device treatment modality and the rest of the world consumes those modalities at reproduction cost.  This can only happen with explicit government protection.  The medical industry claims that if you didn’t have these protections their business would collapse.  The truth is a bit more complex — if Pfizer had to go to Canada and tell them “yes, you could break our patents, but if you do we will not be able to develop these drugs, and thus there will nothing for you to steal” then the market would resolve the issue.  Costs in other parts of the world would rise but they would plummet in the United States — perhaps as much as 80%!
• EMTALA (a Reagan-era law) says that if you are in acute medical distress the closest facility that can effectively treat you must do so, irrespective of your ability to pay or insurance status.  This law effectively shut down charity care in the United States, with the exception of places like St. Jude’s which treat serious but not emergent conditions.  The consequence of the “no turn away” policy ensconced in the law is that indigent people flood emergency rooms across the country, driving costs through the ceiling — and since they don’t have any money, can’t pay and can’t be turned away you get the bill.

There are literally dozens of additional examples, but this shows you where the problem lies.  An uncomplicated birth, when the price from 1963 is taken and inflated by the CPI, should cost under $1,000 in cash in the hospital including a three-night stay.  Today you’re lucky if you can buy one room-night without any treatment of any sort for that amount of money, and the actual cost of what is an utterly-routine medical procedure and event tends to run 10x as much.

The Oklahoma Surgical Center shows that common procedures can be performed for one-fifth of what is typically charged where “insurance” and these distortions are permitted to infest the system.

The fact of the matter is that if we dismantled these monopoly protections we would basically eliminate the need for virtually all medical “entitlement”!

If the cost of an uncomplicated birth was $1,000 instead of $10,000 nearly everyone could pay for it, especially when you consider that you have nine months to amass the money.  That’s $100/month, more or less.  If push came to shove, sell the X-box and the fancy rims on your car.

We refuse to deal with the real issue that is driving these costs and which will destroy the nation in this case, exactly as we refuse to deal with the underlying issue that is producing the rage-monsters that are shooting up schools and movie theaters.

To America and our lawmakers:

STOP CODDLING THE DAMNED MEDICAL INDUSTRY.

As you folks all know I’ve been pounding the table for years about the fact that if we’re serious about addressing what’s wrong with our budget we must break the medical monopolies.

Indeed, there’s an entire sub-category of Tickers dedicated to Health Reform, which I started writing on when the entire Obama mess began and the discussion took off in earnest.

But lately I’ve been asked to look once again at exactly what sort of realistic budget cuts we could make, especially now that the “fiscal cliff” game has been “punted.”

Let’s remember something here folks — last calendar year’s deficit was $1,210 billion. That’s from 12/30/2011 to 12/31/2012, the last “working day” of each year, measured by the outstanding debt.

So here’s the problem in a nutshell.  Anyone can find $20 or $30 billion to cut in the budget.  That’s so trivial that it’s not funny.  $100 million here and $100 million there and you get there.  It’s not hard at all.

But it’s inconsequential, because if you cut $30 billion that’s only about 2.5% of the deficit.

Indeed, even $120 billion, or 10% of the deficit, is not enough to matter.  That would “count” as $1.2 trillion to the wonks in DC, but that’s a lie, for two reasons — there’s a new budget each year and you cannot bind the next Congress no matter what you pass, so only that which you do right now counts.

$120 billion is not enough to matter fiscally.  But this much is assured — if you try to cut $120 billion in real spending 5,000 lobbyists are going to descend on your office and make your life a living hell, no matter which party you are in.

And that, my friends, is for a symbolic change in spending that will do exactly nothing to solve the problem.

If we’re going to make a real difference we have to get to zero.  In fact we have to further and into surplus, but let’s just for a moment go with the IMF’s numbers (or the ECB’s and Eurozone’s in general), which are that a “roughly 3%” deficit is “sustainable.”  That is, let’s allow the government (for right now) tosteal the productivity improvements that you, I and everyone else make.

That, by the way, is why the IMF and Eurozone believe 3% is a “sustainable” deficit although they will never tell you that.

3% of $16 trillion (the size of our economy, roughly) is $480 billion.  To get there we must cut, this year, $720 billion from the budget.

You know those 5,000 angry lobbyists?  They’re at your door.

So let’s ignore them for a minute and ask the question – can we get there?

The answer is “Yes.”  But there is only one way to do it.

We must break the medical monopolies.

The Oklahoma Surgical Center shows us what happens when you break the cost shifting and monopoly game.

Costs come down by 80%, roughly.

Yes, 80%.

Last year we spent about $850 billion at the federal level on medical care.

What if we spent 80% less because we broke the monopolies?

We would spend $680 billion less.

Now can you find another $40 billion in the budget to cut between everything else? 

You bet you can.

So let’s ask the question:

If you’re going to take heat from the lobbyists and everyone else, why not actually solve the problem?

I’m not going to tell you this is some sort of panacea.  We’re talking about taking an actual $700 billion, more or less, out of the economy in the first year.  Right here, right now.  And when we do that there will be real economic consequences.  A real recession.  Real, but temporary, job loss.  A real realignment in the medical industry, and there will be lots of oxen gored.

But seniors will be mostly protected.  Those who are younger will be mostly protected.  Everyone’s costs will come way down, which means that (1) money will get spent elsewhere in the economy and in those other sectors jobs will be gained and (2) seniors and others will mostly be able to paycash for their needed care.

America will become much more internally and internationally competitive as well, as labor costs will dramatically decline.

There is no free lunch folks.  There is only the choice to either play “dog and pony” show once again, which will lead to downgrades and ultimately collapse of our economy, markets and possibly even our government, or we stop with the BS and do the right thing.

This is where the problem has come from.  It is irrefutable in the arithmetic — $53 billion for all medical spending combined by the Federal Government in 1980 to $850 billion this last year.

That’s where the problem is, and unwinding this mess is the only way to fix it.

I stand ready to help with doing the right thing.  I can help take a sharp pencil to this problem, as can many others, and I stand willing and able to do so.  But you, dear Congressperson, must be willing to take the slings and arrows, and those who are serious about this need to both press for it and be willing to sell it.