Internet

The Online Sales Tax Cash Grab

As states lunge for dot-com money, Congress threatens to get into the act.

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In 2014, U.S. sales on the Internet amounted to an estimated $305 billion. While still small in comparison to the $4.7 trillion in overall domestic sales, the online component grew 15 percent over the previous year, sending terror into the hearts not only of brick-and-mortar competitors, but of state legislators desperate to get their hands on sales-tax revenue.

Now the two groups are lobbying Congress to let state governments require businesses to collect sales taxes on out-of-state purchases made online. But they should be careful what they wish for: A bill on the subject is making headway on Capitol Hill, and it's not quite what the two lobbies wanted.

House Judiciary Chairman Bob Goodlatte (R-Va.) is circulating legislation—the Online Sales Simplification Act of 2015—that would make it easier for states to tax online purchases, while also limiting the states' power by allowing for something known as an "origin-based" sales tax. States would tax Internet sales based on the seller's location rather than the buyer's, the opposite of what sales tax expansionists have been pining for.

Under the bill, a California shopper who buys a product online from a vendor in Virginia would be taxed at Virginia's rate of 5.63 percent rather than California's rate of 8.41 percent. (Where local sales taxes exist, these would also apply.) Sellers with outlets in multiple states would collect taxes for the state where they have their largest presence.

The main benefit of an origin-based tax is that it encourages competition between the states, giving governments an incentive to limit their sales tax rates in order to attract and keep businesses. Such a system also allows consumers in high-tax states to escape the burden by buying from sellers in low-rate states. And because it allows taxes only on businesses within the taxers' jurisdictions, an origin-based tax is in line with constitutional protections for interstate commerce.

"Finally, someone in Congress has drafted an approach to the Internet sales tax issue that doesn't empower bureaucrats to tax across state lines and saddle Web-based retailers with enormous complexity," says Andrew Moylan, executive director of the pro-market R Street Institute. Moylan was alluding to the Marketplace Fairness Act, the states' preferred alternative to Goodlatte's bill. The act, which passed the Senate in 2013 but died in the House, would have allowed states to levy sales taxes based on buyers' locations.

As Moylan notes, that "would force online sellers to comply with the tax rules of as many as 9,998 different taxing jurisdictions nationwide, imposing huge compliance burdens and opening them up to audits from all 46 states with statewide sales taxes." It would also destroy tax competition by giving "state-level 'IRS' agents the unprecedented power to enforce their tax obligations on businesses all across the country even if [the businesses] lack a physical presence within [the agents'] jurisdiction."

FotoDB.de/Flickr

Thanks to a 1992 Supreme Court decision (Quill v. North Dakota), a business must have a significant presence in a state before that state can require it to collect sales taxes. The online retailer Amazon must collect taxes from customers in 24 states, because its vast distribution network touches so many places. But most online retailers do not have Amazon's far-flung physical presence.

Many cash-hungry state governments have passed "affiliate nexus" laws, which redefine the concept of "significant presence" in absurd ways—stretching it, for example, so that it includes a blogger in the same state as the buyer who posts a link to an out-of-state vendor. This has led to a series of legal challenges, but the courts have so far encouraged states to continue pursuing such cash-grabbing schemes.

Even if state governments get their way and are able to require out-of-state sellers to collect taxes for them, that won't solve their budget problems. According to data from the Henry J. Kaiser Family Foundation, the states had a combined budget gap of $55 billion in fiscal year 2013. The main academic study that brick-and-mortar retailers cite to show how much money the government is leaving on the table comes from the University of Tennessee business professor William Fox, who estimates that $11.4 billion in annual sales taxes are going uncollected. And even that number is wildly exaggerated-a more realistic estimate was produced by Jeff Eisenach of the American Enterprise Institute and Robert Litan of the Brookings Institution, who put uncollected e-commerce sales taxes at just $3.9 billion in 2008. Were states able to collect every penny of that amount, it would still barely dent their cumulative shortfall.

Although the Goodlatte bill would help put a stop to the trend of state revenue authorities attempting to impose taxes on out-of-state entities, it's still a far cry from pure origin-based taxation. In an ideal scenario, all sales by businesses in California would pay sales taxes at California's 8.41 percent rate, regardless of the location of the buyer. The ravenous desire for more overall revenue, plus the secondary benefits of having companies based in the Golden State (jobs, for instance) would push Sacramento to consider lowering tax rates—driven by the kind of tax competition that benefits customers.

The discussion draft of the Goodlatte legislation offers a more complicated scenario: Virginia might offer a low sales tax with the hope of attracting companies to locate within its borders, and buyers from companies based in the Old Dominion would pay at the Virginia rate. But if the two states are part of the same tax clearinghouse then low-tax Virginia would be required to send the money collected from California buyers in Virginia to high-tax California through the clearinghouse. That means states would still receive money collected where they have no jurisdiction.

This is not as mechanically problematic as a destination-based tax, since the sellers need only collect sales taxes at one rate—that of the state where they are based. But it still gets in the way of the tax competition benefits of a true origin-based tax by diminishing the incentive for states to attract more businesses by maintaining or pursuing lower rates. If a high-tax state will still get some revenue collected from out-of-state sales, they have less reason to lower their rates.

Mitigating this problem from a customer's point of view is that the incentive remains to buy from sellers in low-rate states. And as R Street's Moylan notes, "cutting checks by formula" is one of the few things the government is good at.

The much bigger drawback is that Goodlatte's bill would impose taxes on customers buying from businesses in states that do not have a sales tax at all, such as Delaware and Oregon. A business in any of those states would be required to collect taxes from out-of-state buyers using the lowest combined state and local rate in the country. (At the moment, Wyoming takes that prize with a combined sales tax rate of 5.49 percent.) This provision, which is likely intended to grab more revenue, defeats the point of having an origin-based tax, since it forces certain businesses to collect taxes when they otherwise would not have to.

"The proposal would be improved substantially," Moylan says, "if it better protected sellers in non-sales-tax states (perhaps by allowing them to opt out of any collection scheme)." He also suggests other changes, such as passing legislation to impede the silly abuses allowed by affiliate nexus laws. But ultimately, Moylan thinks a version of Goodlatte's proposal would be "an enormous victory for the cause of sanity in taxation. It would solve the Internet sales tax debacle without imposing a cure worse than the disease and it would help reestablish borders as limits to tax state tax power."

If the goal is to wring as much tax revenue out of consumers as possible, this plan is not the answer. But as a way of making e-commerce taxes both fairer and more straightforward, we could do a lot worse.

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57 responses to “The Online Sales Tax Cash Grab

  1. “It would solve the Internet sales tax debacle”
    yes god forbid there ever be a human activity where the taxman cant get his cut. Some debacle.

    1. ^THIS

      Every time I get in an argument about this, I try to make the statists justify why they should get to take a cut of this transaction.

      It isn’t like Minneapolis will send fire trucks to Amazon’s TX warehouse if it catches on fire. So why does Amazon have to pay Minnesota taxes? What exactly are they getting for paying the grift?

      1. But you can damn well bet that if they *don’t* pay the tax then Minneapolis will send down a battalion of lawyers.

        1. Or arsonists. (OK, a distinction without a difference.)

      2. I’ve made $64,000 so far this year working online and I’m a full time student. I’m using an online business opportunity I heard about and I’ve made such great money. It’s really user friendly and I’m just so happy that I found out about it. Heres what I’ve been doing
        http://www.work-mill.com

  2. I don’t see this as being much of a solution given that your major online retailers seem to be based in CA primarily, and CA has an absurd sales tax.

    1. Keep going. You’re almost there…

      1. I just don’t see sales tax competition as an effective motivator for companies to move to lower tax states, particularly when the major players seem content to stay in CA.

        If it was the origin state that got the money, but the tax rate used was the state level tax rate in the destination state (45 state level tax rates is easy enough to manage vs thousands of county/local rates) consumers in low/no tax states would not be adversely affected.

        1. If company A is selling widgets for 9.99 and being taxed at 9% in California and company B is selling widgets for 9.99 and being taxed at 5.5% then company A is either going to have to sell for a smaller price, give up and go out of business, lobby California for a lower tax rate, or move. California is already losing small companies to states like Texas.

          Using the destination state as the tax rate would force retailers to keep up with every tax rate in every state and be open to audit from every state. That is insane. Keeping seperate books on 45 states for sales tax is NOT easy to manage. It’s bad enough we force business to be tax collectors in the first place. Making it more difficult is not a better solution.

          1. That is insane. Keeping seperate books on 45 states for sales tax is NOT easy to manage.

            But think of the JOBS!

          2. It’s not 45 states, it’s also thousands of cities, counties, hospital districts, mosquito abatement districts, football stadium districts (Denver’s is called the Scientific & Cultural Facility), all with their own peculiar boundaries. We get a 100K line data file every month for all US jurisdictions. I bet that if one were to undertake a rigorous audit, 10% of online taxes would be wrong ins some petty detail.

          3. Perhaps I didn’t explain it well enough.

            The state where the seller is gets the money. This is the ONLY state that the seller submits a return to.
            The rate charged to the customer is the state level rate for where the item is shipped.

            No out of state return need be filed
            No out of state auditors
            No books for each state
            No concern for local sales tax rates.

            A customer in Chicago buying from a California seller gets charged the 6.25% Illinois rate, all the money goes to CA. The Cook and Chicago sales taxes are not factored at all.

            A customer in Oregon who buys from a California seller gets charged no sales tax as there is no sales tax in OR.

            A customer in California who buys from an Oregon seller also pays no sales tax because the seller (in OR) has no one to remit the tax to.

            This is preferable to an origin tax simply because it doesn’t force residents of low/no tax states to pay a premium for shopping online.
            This is preferable to a pure destination tax because it avoids the roya PITA of dealing with cities and counties.

            I used to work in sales tax compliance. I know what a giant PITA dealing with all the cities and counties who had their own rates and tax returns is. Even bigger PITA when it comes to special tax districts with borders that don’t follow regular political boundaries. (I’m looking at you Texas, Colorado, and IIRC Louisanna and Mississippi)

            1. I prefer the status quo.

              If there absolutely has to be sales tax charged on interstate purchases, this is how I would want it done.

            2. No this is NOT preferable. It requires sellers to know the buyer’s tax rate, and that is where the problem lies. Did you even read my comment? We get 100,000 lines of data every month on tax rates throughout the US, and have to do some serious shenanigans to even guess at which apply to every transaction we process. It is no trivial matter to figure out from an imperfect address whether someone is inside or outside somepodunk mosquito abatement tax district.

              Just do it like brick and mortar stores. Seller charges and collects the tax based on seller location, and remits it to seller’s governments, exactly as if they were a brick and mortar store with walk-in customers. Your solution is a pathetic misunderstanding of reality.

              1. Are you intentionally being blind.

                I don’t know how much clearer I can say
                The rate charged to the customer is the state level rate for where the item is shipped.

                IGNORE LOCAL RATES. STATE LEVEL RATES ONLY

                I am fully aware of how stupendously difficult the task of determining an accurate local rate is.

                1. OK, so throw out the thousands of variations. You are still stuck with 50 state variations, not 45, because you still need regualr and timely updates on all those 50 states.

                  Who provides those updates? Local taxes are easily handled by the various governments knowing who has business licenses. Are you seriously expecting every state to send updates to every busness in every state? Or are you seriously expecting every business to check every state for updates every day, week, or month?

                  1. Not at all.
                    The home state of the business would do the communicating of other states state rate updates.

                    Considering we are talking about internet businesses, they almost certainly have some type of ecommerce system which would probably be handling this detail anyway.

                    1. Right….. that’ll happen.

                  2. Ah, Scarecrow Repair… could the Marketplace create a company (or several competing companies) who would collect, aggregate and disseminate that ton of different tax tables to any seller who’d care to buy the service… plus an “app” (pardon the expression) that would quickly, easily and transparently both calculate the appropriate tax at any OR all levels AND electronically transfer the funds to the appropriate agency?

                    Moaning about ‘lots of paperwork’ for sellers is anachronistic. Computers can do all that in an instant, and a subscription Service Company could provide everything anyone needs. Plus someone to sue when their ox gets gored or someone makes a mistake. Ideally, the Service company would be a non-profit pass-through where all expenses are adjusted to match income so there’s nothing left to sue them for!

                    Now, I do wonder what the Consequences (intended, unintended or even Surprise kinds) would be for the various States, Cities, municipalities or water districts when all of this tax information is visible and transparent to ALL Buyers AND Sellers?

                    Bogus mail drops just across the state line? Companies relocating to evade/avoid/game the system out of existence?

                    Mind-boggling to me to even try to guess what the real-world ramifications might be… I think that kind of policy or nationwide law SHOULD be enacted, just to prove, in the long run, how big of a mistake it was to enact!

                    1. … and for those of you NOT living in NC, google up what NC is looking at now…
                      The idea that Sales Taxes, when collected AT the Point Of Sale… are not “fairly distributed” if the buyer LIVES in a small town and travels to a large CITY to BUY the item, where the tax is collected and flows to the Big City!

                      You want a SHTF situation? Stay tuned to this New Level Of Stupidity.
                      And, as usual, nobody defines “Fair” but ‘everybody recognizes what’s “unfair”.’

                      Sheer Madness!

                    2. @plusa

                      There are companies that do that already. They also get it wrong frequently.

                      Local sales taxes are really are an absolute nightmare.

                      A lot of people think you can just use a zip code. Don’t work. Its not even remotely close. Zip codes are postal boundaries. They extend beyond municipal boundaries and into unincorporated areas.

                      Special sales tax districts may follow established political boundaries like municipal or county boundaries, but more frequently they do not. They certainly don’t follow postal boundaries.

                      Colorado and Texas are to my recollection the worst offenders.

                      But collection isn’t the only problem. You need to file tax returns, and remit the funds.
                      Our customers that were big national companies frequently each had hundreds of sales tax returns that needed to be filed monthly.

        2. A state hosts a large online retailer and a high tax burden, and now that retailer has a reason to bitch *loud* when its upstart competitors in low-tax burden states start getting the business that retailer expected.

          So, what does the retailer in the high-tax burden state do – they add in their voice to the bitching about taxes. And if the losses are high enough they move out of state.

          Keep in mind that the large online retailers are really not much more than an office and a bunch of warehouses – warehouses that are probably scattered all over the country already so its just a matter of moving the head office out.

        3. the major players seem content to stay in CA

          I’m sorry, what?

          I’ve maybe received one or two things ever that have started in a warehouse in CA. Most of it comes from FL, TN, and PA. Some from TX and KY.

        4. the major players seem content to stay in CA

          I’m sorry, what?

          I’ve maybe received one or two things ever that have started in a warehouse in CA. Most of it comes from FL, TN, and PA. Some from TX and KY.

    2. I don’t think this is true. The top retailers in 2013 were:
      Amazon
      Apple
      Staples
      Walmart
      Sears
      Liberty Interactive (QVC and other online retailers)
      Netflix
      Macy’s
      Office Depot
      Dell

      Presumably most would be unaffected because they have stores in all the locations – Walmart, Macy’s, etc. Of the remaining:

      Amazon is in Washington
      Apple is in California
      Liberty is in Coloardo
      Netflix is in California
      Dell is in Texas

      1. Apple has retail stores in most states.

  3. I like how the local merchants who are pushing for this label it a ‘fairness issue.’ “Hey, you coerce me into collecting money from my customers, it’s only fair you coerce my competitors too.”

    1. Yeah, its always like this.

      They just give up on fighting the increasing regulation and just demand that the regulators have more power over their competitors business model.

      But its not like we don’t do the same – how many times have people on this board advocated for building a wall across the border to stop welfare exploitation because that’s easier than fighting the root cause (the existence of liberal welfare)?

      1. On this board? Outside of lonewacko, almost never.

  4. In my state we’re required to pay a Use Tax. That means we’re supposed to voluntarily declare anything that we purchase out of state, and then pay sales tax on it. If sales tax was paid in another state, but that sales tax is lower than this state’s, then we’re supposed to pay the difference.

    I don’t know anyone who follows that particular law.

    1. I think almost every state has that sort of law.

      And no one follows it which is why there’s always been a push to have businesses collect the tax – not because its *easier*, but because its more lucrative to strong-arm the business than chase down its customers.

    2. For larger ticket items, like a car, you can’t get it registered if you don’t show proof that you’ve paid that difference in tax.

      I know when I bought my truck out of state, the dealership dealt with the taxes. I just paid tax as if I bought it in-state, and they sent said tax money to my state. There was no way to avoid the tax issue.

    3. California has that too. Lovely state isn’t it?

  5. how are they going to collect for purchases from asia ?

    1. Customs fee?

  6. If I buy from a brick and mortar store, I pay the tax based on the store’s location. Every purchase has the same tax. The cashier does not ask to see my driver’s license to figure out the tax.

    It should be the same for internet stores. Let the internet company figure out their location, based on incorporation or hq or whatever, and figure out that one rate for all transactions, regardless of whether in-store, web, phone, mail, or carrier pigeon.

    There are thousands of people, me included, who would have to find other work, and my employer would be damned happy to have me doing something else.

    1. Yes, it is not entirely clear to me how the government in Chicago thinks it should get a cut if someone who lives there buys something from “Desert T Shirts” in Phoenix. Exactly what theory of government makes this legitimate?

      Inside the US the Federal government has exclusive control over interstate commerce. This is explicitly to prevent things like tariffs between states. Which is precisely what this “internet sales tax” idea looks like. “If you want to sell your products to the residents of my territory, you have to send a cut to me”. If that isn’t in violation of the commerce clause, I don’t know what is.

      1. If that isn’t in violation of the commerce clause, I don’t know what is.

        I’ve been saying that the moment I learned about the Use Tax.

        1. Of course, that puts us squarely in the “nutty old crank” category. The vast majority of things that our government does these days is a clear and unambiguous violation of the constitution. Not on “human rights” grounds, just on simple “this is how the constitution of the US is constructed” grounds. Hence the reason that the 9th and 10th amendments were taken out behind the shed, shot and buried in a shallow grave many, many decades ago.

          1. Well, yeah. Anyone who says the Constitution means what it actually says is crazy.

      2. “Exactly what theory of government makes this legitimate?”

        FYTW, of course.

    2. If you are from Oregon but are shopping in Washington you can show your ID and get your sales tax waived (Oregon has no sales tax). I think that was a law passed in WA though to try to get people to come over and shop.

    3. If I buy from a brick and mortar store, I pay the tax based on the store’s location.

      Only if you take the product with you. If you have the seller ship the product to you, you don’t pay the sales tax (if it’s not a multi-state chain). My dad used to buy all our appliances across the sate line from mom-and-pop retailers and have them delivered.

  7. No way in hell that passes. Amazon is based in Washington where I live and has an 8.5% sales tax. They will buy off whoever needs buying to stop this one.

    1. I have to admit, I’d probably cut way back on my Amazon expenditures if I had to pay WA state sales tax on them.

  8. So my CPA tells me this year that the state is asking for everyone to disclose how much they spent on online purchases in the last year, so they can apply the sales tax and deduct it from your return. I asked her if there was any way for the state to verify how much I’d actually spent, she said not without a lot of time and effort. So I told her, “Zero dollars,” and considered the matter closed.

    Anyone else have to deal with that bullshit?

    1. Turbo Tax appeared to make it a more prominent question this year as opposed to other years on the federal portion (maybe it’s the first it’s showed up?). Ohio has done the Use Tax thing for a long time.

      I laugh heartily at those questions before entering nothing.

  9. A better euphemism than “origin-based tax” would be “ordinary sales tax.” As others on this thread have noted, the whole concept of paying taxes based on the buyer’s location has no parallel in the real world of bricks n’ mortar stores.

    I’m a Virginia resident, but if I buy a soda from a Maryland 7-11, I pay Maryland sales tax. Period, end of story. Why shouldn’t it be the same for online purchases as well? The only reason why there is any discussion at all of doing it differently for online sales is because that would get certain state & local governments more revenue AND immunize them against having to be competitive on tax rates. That and the big box retailers want protection against online competition. The Marketplace Fairness Act is rent-seeking in its purest form.

    It’s not like the price advantage of online sales is that great anyway. When I order something online, the packaging and shipping costs usually wipe out any savings. And, of course, you have to wait for your order to arrive in the mail.

    1. Ye have little imagination.

      I find a great price on something I want NOW from an on-line retailer and purchase. Then I go to a local retailer and purchase so I can have it NOW and save the receipt – then when the on-line purchase finally arrives a week later I return that newly-arrived-and-unopened item to the local retailer. Instant gratification AND on-line savings.

  10. Also, several states are considering taxing services. So there will be a tax on shipping charges, too.

    And then these entities wonder why demand is down.

  11. My last pay check was $9500 working 12 hours a week online. My neighbors sister has been averaging 15k for months now and she works about 20 hours a week. I can’t believe how easy it was once I tried it out.
    =============================
    try this site ????? http://www.jobsfish.com
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  12. If they do this then they have to drop the hammer all the way. Cities and other localities have their own tax gouging going on. The Chicago sale tax is 9.25%. Why should online sales in Chicago get a 3% tax break when the state rate is 6.25%? Local sales taxes in Louisiana, Alabama (Birmingham has a 10% sales tax), Colorado, NY and Oklahoma are ALL over 4%

    So if states want to screw people then I say screw ALL the people. Then let’s see how much everyone loves it.

  13. “… the Brookings Institution, who put uncollected e-commerce sales taxes at just $3.9 billion in 2008. Were states able to collect every penny of that amount, it would still barely dent their cumulative shortfall.”

    I would wager that even this number doesn’t take into account any recapture of this “lost” revenue by the State when the consumers spend the savings on goods bought conventionally in their local State.

  14. Sorry, I don’t quite see this argument. Issue is whether out-of-state sellers should be considered in-state sellers, or out-of-state buyers should be considered in-state buyers. If buyers may choose among states with lower sales taxes it might mean more competition, than if states can tax all buyers, but the latter might encourage businesses to move to low tax states. As it is now they have none since most of them are paying none at all.

  15. Sorry, guys, but I figured out the cause of this crap long ago…
    http://www.plusaf.com/falklaws.htm#33rd

    Falk’s Thirty-Third Law:
    “The Only Criterion for putting a Tax on something is that the “something” must be Measurable. No other reason is necessary.”

    You will never find any other explanation which explains so rationally and succinctly why anything is taxed.

    If it can be measured, it’s a target for someone in Government to find a justification to tax it.

    Remember the Boston Tea Party? “Taxation Without Representation”?

    Now consider the Inheritance Tax. [a.k.a., “Estate Taxes”] …
    If that’s not the ultimate “Taxation Without Representation,” what is?

    QED…

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