Slashdot Mirror
The Inevitable Internet Sales Tax?
shankwound asks: "My company is going through a Pennsylvania State tax audit. The auditor claims that we owe sales/use tax on all of our Internet purchases. I thought that there was some kind of federal moratorium on Internet taxes. Apparently I was wrong. Our friendly auditor has worked up quite a bill with tax and penalties. Paying this bill off won't be fun. Although computer related services are exempt under PA law, online purchases of tangible personal property are not. On the federal level, U.S. Rep. Christopher Cox seems to be leading the battle against "new" Internet taxes, but that doesn't stop any already existing state sales/use taxes from being applied. The federal law has specific exemptions that don't cover existing taxes. I bet the general consensus is that you don't owe tax on Internet purchases of any kind. I'm wondering what Slashdot readers think about issue and if anyone has had a similar experience with their state auditors. Don't be caught off guard. Check your state's Internet tax rules before you're audited." For those of you running e-Commerce sites, now might be a good time to check those local tax laws.
Taxes have one major benefit for the people: They fund public projects. Public projects are good, they are things like roads, schools, libraries, busses etc. Without taxes you don't get these things.
If you poll most Americans (or read existing polls which have been done on this subject), you'll find that most Americans are willing to pay taxes if they know the money will be spent on worthwile public projects. That is, they're willing to pay more in taxes if they know the money is going to fund schools or libraries or whatever. Recently, in Fresno (for example), the voters overwhelmingly voted themselves a tax increase in the form of the "Arts to Zoo" proposal which would increase funding for libraries, museums, the local Fresno Zoo, and other similar projects--and pay for them in an increase in the local sales tax levy.
The problem that most Americans have with taxes is that they appear to believe that the majority of taxes is being "wasted" on "pork-barrel" projects and on paying bureaucrats who are "out of touch" or are "unresponsive" or "do not care." To support this assertion, we are constantly bombarded with reports of a $3000 toilet seat or an 8-lane highway built in the middle of nowhere.
The other problem that most Americans have with taxes is the belief that taxes are being assessed "unfairly"--that is, they believe that the rich are somehow not being forced to share their fair load, and that the middle class is having it socked to them. And in a sense, if you count Social Security (where 15% of your income up to around $70K or so goes to social security, but each dollar you make above that cut-off is only taxed at 2%), then there is a middle-class "vortex" where the combined income and social security taxes take a greater percentage of your income than those who are rich and paying the top income bracket.
If we could somehow eliminate these two problems, then Americans wouldn't see taxes as a four-letter word.
Oh, and in Los Angeles, traffic is worse than it is in Seattle: yesterday, my drive at 6:00 in the morning (when traffic is supposed to be "light") to the LAX area from Glendale (about 30 miles) took me about an hour and three-quarters. The reason for this, though, is that the city of Los Angeles and the State of California, instead of spending money to widen the freeways, spent several tens billion dollars on a subway and light-rail project which only has a maximum capacity of a hundred-thousand or so per day, and has a fixed commute pattern (from the outerlying communities to downtown Los Angeles) which runs counter to the decentralized commute patterns that are normally used by Angelinos.
This is a perfect example of why Americans have problems with paying taxes: because no effort was made to increase the capacity of the freeways here, average traffic speeds during rush-hour traffic is now down below 17MPH (yes, seventeen miles per hour), yet even if the entire LA metropolitan area could rearrange itself to maximize use of our new multi-billion dollar subway system, we'd perhaps reduce traffic by a couple of percentage points.
I'd rather have taken the money used to pay for the art installations around the Hollywood subway stop and used it to help support the LA county museum of art. But no-one asked me...
I am a lawyer, but this is not legal advice. If you need legal advice, contact a lawyer nlicensed in your jurisdiction.
There's nothing new here; you've generally been liable under use taxes for new property purchased from out of state. Mail order purchase have never been tax free, either; it's just that most people dodge the tax.
Mail order vendors do not collect taxes for other states not because it isn't owed, but because, at the time it was litigated, it would have been horrendously complicated for a firm to fill out forms for 50 states on a regular basis, not to mention the political subdivisions (states, counties) with their own taxes. At the time, the Supreme Court did not rule that it was illegal, but that if the taxes were to be directly collected on such interstate transaction, it was up to Congress to find a way to do it.
Today it would be close to trivial to implement such a system--the lookup table by zip code for the tax to be collected would be easy. Extensions to existing software would be minor.
I'm puzzled by the very notion that buying on the internet should somehow circumvent existing tax laws. Your owns state has sales and use taxes to pay for the services provided in your area. As a sidenote, as an economist I'd rather replace all income taxes with consumption taxes anyway [*replace*, not supplement. No VAT without income tax repeal!]. The local government's claim to tax the purchase is exactly the same as their claim to tax whatever you buy at the local store; it's a way to allocate taxes, charging more to those who purchase more.
As a side not, the federal government does *not* have the power to stop states from imposing taxes on their own citizens (not that this will stop Congress; the last limits of the Consititution have not been restored since FDR trampled upon them). There is *some* ability to regulate what happens when the goods are shipped interstate, but if the state taxes the good, rather than the sale, it's a stretch for the feds to be involved at all.
hawk, esq., and professor of economics
Okay, there's a difference between sales tax and use tax. Not all states have use taxes.
Currently, for the purpose of taxation, internet is the same as mail-order.
Where a company sells in a state, that state may require the company to collect a sales or use tax, assuming nexus is established. Whether a company is liable for a tax depends on whether the company has nexus in the state. It also depends on the tangible or intangible nature of the product or service sold.
Nexus for sales and use tax is different from nexus for income tax. A company may have nexus for one and not the other.
Sales tax is a tax based on the gross sales price of property. It is collected by the seller of the property. The consumer of the property may be an individual buying the product from a local retailer, or a business buying a product which is "consumed" in the process of making other products.
There are a handful of exemptions from sales tax. The most common exemption is the purchase of an item for resale. The exemption that we are concerned with here is the exemption for a sale to an out-of-state buyer.
When a company sells to an out-of-state buyer, the sale is usually exempt from sales tax in the seller's state of residence. For instance, a retailer preparing a California sales and use tax return would find that "sales in interstate or foreign commerce" are exempt from sales tax. The instructions to the California form indicate that exempt sales are "those involving shipments or deliveries from California to points outside this State which are exempt from tax as interstate or foreign commerce. In order to be exempt, property must be shipped to a point outside this State, pursuant to the contract of sale, and delivered by the retailer to such point by means of facilities operated by the retailer, delivery by the retailer to a carrier for shipment to a consignee at such a point, or delivery by the retailer to a customs broker or forwarding agent for shipment outside this State." California's rules are fairly typical of the way out-of-state sales are treated.
A retailer making an out-of-state sale is usually not liable for sales tax in the retailer's home state. Neither is the retailer liable for sales tax in the state where the customer is located, unless the retailer has nexus in that state. It is possible, then, for out-of-state sales to be completely free of sales tax.
Use tax: A sale that is not subject to sales tax in the states of either the buyer or seller is a serious problem. States have attempted to remedy this problem with a use tax. A use tax is exactly the same as the sales tax, except that it is charged to the buyer of property by the state in which the property is used. For example, a mail-order computer company may not be required to collect a sales tax. The buyer, however, is required to compute a use tax and pay it to the state in which the computer is used. Use tax, for all practical purposes, is the same as sales tax, and is meant to pick up sales which are not subject to sales tax.
The use tax is imposed on purchasers, not sellers. Out-of-state sellers with nexus in a state may be required to collect the use tax, but that does not change the fact that it is imposed on the purchasers. If the out-of-state seller does not collect the use tax, the state can come after the purchaser for the tax.
The difficulty with the use tax is that there is almost universal noncompliance. Most buyers do not know that they should pay a use tax. There are a few exceptions, however. For example, automobiles and boats purchased out-of-state must be registered. Use tax is payable at the time of registration.
Because of the difficulties involved in getting purchasers to remit use tax, states have attempted to get out-of-state sellers to collect the tax. The Supreme Court has consistently held against states unless the seller has nexus in the state.
States continue to seek ways to collect the use tax. In 1988, a group of states began developing lists of purchasers from mail-order companies. Each state shared information with other states based on their audits of mail-order companies headquartered in their state. Several years later, certain states began sending out forms to these purchasers. The forms requested the purchasers to verify reported purchases and pay use tax to the state.
Obviously, such efforts are only a drop in a very large bucket. Substantial mail-order business takes place without sales or use tax being charged, and with no chance of the consumer voluntarily paying the tax, or even knowing the tax is due. The states will have no chance of capturing even a small portion of this tax.
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- Give a man a fire and he's warm for a day, but set him on fire and he's warm for the rest of his life.
The European taxes are actually value-added taxes, not sales taxes, and therefore the true costs are higher, but hidden. Additionally, they cascade on each other, so that you have tax on tax.
There are actually two proposals active in the U.S. House to eliminate the federal income tax and replace it with a single-rate, single-stagenational sales tax on first-use retail goods and services only. One plan sets the rate at 15%, the other at 23% and also elminates Social Security and Medicare payroll withholding.
"Holy sh*t!" might be a common reaction to rates that high, but the fact is that corporate income taxes, other hidden taxes, and complaince costs already add 20-40% to the price of everthing we buy -- and buy with after-tax dollars. Of course, it's also a good kick in the pants to Congress to think about trimming down some of that pork-barrel spending so everyone can get a tax cut.
As to regressivity, there are two ways to eliminate that. One can either exempt certain items from the tax, which is a bad idea because it sets a precedent for loopholes and exceptions, and is horrendously complicated to administer. The better way is to provide a rebate to everyone, based on family size instead of income, that refunds the amount of tax paid on subsistence-level spending. The NRST proposals do this latter approach, and even pay the rebate in advance. As such, a family living at the poverty line pays, in effect, no taxes yet still has a 23% tax rate at the register.
For more information on the national retail sales tax proposals, see Americans for Fair Taxation (AFT) or Citizens for an Alternative Tax System (CATS).
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