November 29, 2006
Online Sales + Tax
It’s a question that’s been debated almost from the very first sale of a product online: Should merchants be required to collect sales tax for the states where the product is shipped to or sold from?
To date, the answer has been that whether taxes are collected or not is pretty much up to the merchant. As a piece by Janet Novak on the Forbes web site points out, the Supreme Court handed down a decision in what has become known as the Quill case which said states cannot require an online retailer to collect tax unless it has some physical connection to the state, such as a warehouse, administrative building, etc.
Last year, senators from both sides of the aisle, Sen. Michael Enzi, R-Wyo. and Sen. Byron Dorgan, D-N.D., introduced bills that would have required e-tailers and catalog companies to collect sales tax for states that are members of the Streamlined Sales and Use Tax Agreement (SSUTA).
The SSUTA was created, according to it web site, to “develop measures to design, test and implement a sales and use tax system that radically simplifies sales and use taxes.”
According to the Forbes piece, retailers including Best Buy, Circuit City, Target and Wal-Mart currently collect taxes for purchases made online. Amazon.com, however, only collects taxes for items shipped to Kansas, Kentucky, North Dakota and the state of Washington.
It’s not only state budget authorities that would like to see a system developed that would require online retailers to collect state sales taxes.
A group known as the E-fairness Coalition, which represents shopping mall operators along with brick-and-mortar retailers, has been calling on Congress to pass a law similar to the bills introduced last year by Messrs. Enzi and Dorgan.
The E-fairness Coalition cites a number of studies to quantify the impact that continuing as-is will have on state and local governments. The Center for Business and Economic Research projects that in 2008 state and local governments will lose between $21.5 billion and $33.7 billion in uncollected taxes. The Institute for State Studies projects states and local governments will lose as much as $54.8 billion in revenues by 2011.
Moving into a new Congress under Democratic control, groups such as the E-fairness Coalition and the SSUTA are hopeful that a law similar to those previously proposed will be introduced and passed. It still remains to be seen if this scenario will play out as the new Congressional majority has pledged itself to alleviating “middle class squeeze.”
Discussion Questions: Is it time for Congress to take steps to require the collection of state and local taxes by retailers selling goods online? What
do you believe would be the consequences of such an action?
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Collecting taxes from online sales would add revenue needed to support things we all take for granted. Not collecting online taxes is a form of legal “tax evasion.” If everyone paid their fair share, then taxes might be lower than what we currently experience. Folks tend to forget that without taxes we also would not have all the amenities that we enjoy. There would have to be measures in place, such as if you buy a used car online that has a value of $$$ then it is tax free, similar to things the states have in place of avoid tax upon tax for items and services.
To the extent that we have adopted a Sales Tax system in this country, I believe all Internet sales should be taxable too.
As to who legislates it, that’s easy. Under our current system of governing ourselves, states govern their own tax laws. It should remain that way. Congress should have nothing to do with this until the day we decide to change from a laissez faire form of government to a centrally controlled one.
Let me remind the readership that every state that collects sales taxes has Sales Tax Offices in every major city in the US for the sole purpose of auditing companies’ Sales Tax collection records and due filing. It should be no different with Sales Tax collected on behalf of the destination state for an Internet sale.
As a consumer, my first reaction is for no online sales tax because I like the offset of no sales tax versus the cost of shipping. As a business professional and citizen of a state that is going through tough times (Michigan), I would be in favor of sales tax on online purchases. It is our responsibility to protect the merchants that have invested in our communities in terms of brick and mortar as well as employment for our family, friends and neighbors. To place them at a competitive disadvantage makes no long term sense to me! We also need to continue to support and extend the real purpose of sales tax as it is a consumption tax that benefits our states and our communities.
As I understand it, different states have different rates of taxation. Imagine the extra time shoppers will spend online searching for products and comparing price when they have to figure out which state charges how much. If that doesn’t slow down sales I don’t know what will.
The 10th Amendment to the Constitution stipulates that states are to be self governed, (and one can assume that this means collecting taxes), except in areas where inter-state commerce, or matters of law otherwise stated in the US Constitution are concerned. The former being the case, it would seem that it is well within the rights of the federal government to step in. (And this from a Southerner who still supports the Confederacy’s fight for State’s Rights 150 years ago).
Because I live in a state with a high sales tax, (California), but come from one with a moderate one, (Virginia), I know that the question is then one of whether the tax should be that of the state of origin or the state of destination. This I will leave to the elected officials on The Hill, as it would seem that there is no way that it can truly be 100% fair for everyone, every time something is bought or sold. However, there are already too many ways people are finding to avoid paying taxes, legally and otherwise, so to close this gap a little, by simply having people pay taxes on goods they are already purchasing, in states where they would already be taxed, is no great hardship or violation of our rights. It is, instead, an obligation we have as citizens, and the price we pay to have the services of the government we have.
This debate has stretched on for years. In 1999, Congress established a national advisory commission to explore this issue and the New York Times covered its activities in March 2000. State governors generally favored online sales taxes because they promised a revenue stream. National conservatives mostly favored an ongoing e-tax moratorium. It comes down to a clash of philosophies: “level playing field” versus “no new taxes.” At the time, I wrote about four principles to this issue that I believe remain germane in 2006:
One. An online sales tax loophole is regressive. Since the poorest people have the least Internet access, they have least access to this tax break.
Two. Policies in this debate were mainly influenced by telecom interests circa 2000. This is changing today, since multichannel retailers have a stake in promoting clarity and consistency on the issue.
Three. The traditional direct marketing and catalog sales industry has a stake in this debate as well, since they enjoy the sales tax loophole. If the law changes for online sales, DMers will be swept along.
Four. The only righteous principle for determining which sales tax jurisdiction and rate to apply for a given purchase is that the rule of the ship-to-address must apply. Any other scheme will cause online retailers to relocate to the Cayman Islands.
Collecting the accurate sales tax online and distributing the funds to the proper states and municipalities may seem complicated, but in fact there are already several solution providers who can handle the task as a plug-in to existing e-commerce sites.
Sales taxes are already the law of the land. This debate focuses on how we are to apply these laws in the virtual marketplace. I have little doubt that the “level playing field” will eventually prevail.
Unless consumers clearly see a benefit to collecting taxes on all online purchases, sounds like it could be a cause for more consumer activism directed at the states as well as Congress.
I think one point being missed is that not everyone shops online to avoid paying sales tax; the overall convenience and not having to put with mediocre customer service and it will arrive in a day or two.
Anecdotally, you end up paying about the same dollars for the item when shipping and handling are included so that appears to be a red herring for brick and mortars. Brick and mortars with good to exceptional customer service and selection are gong to thrive. It’s the marginals that are bound to fail sooner or later, regardless of e-commerce.
The only way I would be for this is that the e-commerce money goes to a very specific purpose and not into the general fund. Not like the smoke and mirrors of the state “Education Lottery.”
Online shoppers love saving sales tax, particularly for higher ticket purchases such as electronics. There are a few states that charge no sales tax at all (Alaska, Delaware, Hawaii, Montana, New Hampshire, and Oregon), and some of these would make fine warehouse locations for an online business to ship from nationally. But politicians generally don’t like imposing new taxes. Let’s see if the bricks-and-mortar retailers form stronger alliances with state and local governments to lobby successfully for sales tax equity.
I believe this is another lightning-rod issue because it touches on such issues as government fairness and effectiveness, personal freedom, and personal money. Hot topics indeed. Our research indicates that there are huge numbers of people in the US who feel that governments (state, local, federal) are bloated, inefficient, greedy, ineffective, and abusive of power. These feelings may not be baseless — for example, we have data that indicates that state and federal agencies operate at some of the lowest levels of efficiency we have ever recorded, and that the information processed by these organizations’ Fundamental Information Processes is valid less then 3% of the time. Astonishing, if you think about it.
The studies cited in this discussion do indeed say “…will lose…in uncollected taxes.” What the studies found is that there were amounts of taxes that COULD be collected that will not be, and then the studies called this “lost” money. This is entirely fallacious reasoning and borders on deceptive. Potential income is not lost income if it is not captured; money is only lost if you have it and then lose it. I believe this is just one an example of how poorly a topic like this is processed in general. The authors of the studies, and those who are using the studies to further their agendas, are making fundamental logical errors, which is almost always a sign, according to our research, of defensiveness, not mental incapacity.
We have a long way to go in having an effective process for dealing with issues like this in our country.
I think the simplest answer to the question about whether this is solely a state matter comes down to the obvious fact that most Internet transactions are interstate. You could have states battling it out over who gets the tax revenues (where it is sold versus where it is purchased for example) or you could work that out collectively across the nation. That by its definition is a federal matter. At least that’s my take on it.
This subject has been bandied about for almost 10 years now. On the one hand collecting sales tax might have a negative impact on sales. On the other hand that is a heck of a lot of money that is being left on the table. A question to be asked is “Why should Internet sales be treated differently from paper based catalog sales?” Why should Congress get involved? Isn’t this a states matter? Does Congress get involved in state and local tax collection of catalog sales? Doesn’t Congress have more pressing issues to contend with? Or is this easier than Iraq, corruption, minimum wage, health care, social security and ending pork?
This all depends on your philosophy on taxes. For myself, I prefer that taxes on activities be collected to pay for government services required to support those activities: building permit fees pay for the building department, park use fees pay for the parks, etc., etc. That doesn’t mean it is never appropriate to collect general taxes, with no direct relation to government services provided.
However, government employees (and there are more of those than ANY other kind in this country, about one out of three), on balance, overwhelmingly favor general harvesting of the population without the accountability of having to provide specific services for specific revenue. Moreover that huge block favoring collecting more taxes, any time, any where, are joined by a significant contingent of enablers/supporters from the non-governmental citizens, to drive relentless growth of the government machine, with ever more aggressive milking of the economic machine.
So what services do the local governments propose to provide to internet commerce? Not much. It’s just another honey pot that they lust after. I really don’t care so much about whether they tax internet commerce as I do about the fact that they will use the money to grow an even larger government. Much like my business advisor telling me that he wasn’t worried about leasing more space than we really needed, he was worried about me filling it with more people. :>)
In the same way, there is a relentless struggle between the productive, economic machine, and the overhead, governmental machine. For every dollar the overhead machine collects, it seems to need ANOTHER dollar to support its purposes. (Same thing happens in companies. :>)
Although I am not apocalyptic, I do recognize that there is such a thing as a tipping point in the relation between the two machines. From time to time the pro government forces succeed in so hampering the economic engine that their control is wrested from them and passed to those more fiscally disciplined. (And it’s obviously not totally a “party” thing.) Personally, I believe we have more government than we need, and ordinarily vote against every tax – but not always. I’ll be voting against any taxes on online commerce. Every business there is already paying many taxes that are simply unavoidable, we have such a tax web – payroll taxes, property taxes, etc., etc.
I am a bit surprised by several responses here. Are we simply arguing for our own self-interest? “Fair share”? Hmm, I suppose the 6 states mentioned without sales taxes are “unfair” to residents of the other 44 States?!? “Sales tax equity” — but you are not bothered that adjacent counties have different sales taxes currently?!?
Call centers are moved overseas because they are seen as more efficient, allowing services to be provided at lower cost. The internet may also bring other efficiencies — it saves me time, gas (and emissions) and parking. It enables our infrastructure (roads) to support an increased population. It may be like working from home — we don’t need as many office buildings and our houses are not empty 10 hours a day. It’s a new millennium and you can’t turn back the clock, however much you may not personally benefit from these changes. Remember, these tax dollars come from the pockets of our customers. Let’s focus on governmental efficiencies.
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Collecting taxes from online sales would add revenue needed to support things we all take for granted. Not collecting online taxes is a form of legal “tax evasion.” If everyone paid their fair share, then taxes might be lower than what we currently experience. Folks tend to forget that without taxes we also would not have all the amenities that we enjoy. There would have to be measures in place, such as if you buy a used car online that has a value of $$$ then it is tax free, similar to things the states have in place of avoid tax upon tax for items and services.
To the extent that we have adopted a Sales Tax system in this country, I believe all Internet sales should be taxable too.
As to who legislates it, that’s easy. Under our current system of governing ourselves, states govern their own tax laws. It should remain that way. Congress should have nothing to do with this until the day we decide to change from a laissez faire form of government to a centrally controlled one.
Let me remind the readership that every state that collects sales taxes has Sales Tax Offices in every major city in the US for the sole purpose of auditing companies’ Sales Tax collection records and due filing. It should be no different with Sales Tax collected on behalf of the destination state for an Internet sale.
As a consumer, my first reaction is for no online sales tax because I like the offset of no sales tax versus the cost of shipping. As a business professional and citizen of a state that is going through tough times (Michigan), I would be in favor of sales tax on online purchases. It is our responsibility to protect the merchants that have invested in our communities in terms of brick and mortar as well as employment for our family, friends and neighbors. To place them at a competitive disadvantage makes no long term sense to me! We also need to continue to support and extend the real purpose of sales tax as it is a consumption tax that benefits our states and our communities.
As I understand it, different states have different rates of taxation. Imagine the extra time shoppers will spend online searching for products and comparing price when they have to figure out which state charges how much. If that doesn’t slow down sales I don’t know what will.
The 10th Amendment to the Constitution stipulates that states are to be self governed, (and one can assume that this means collecting taxes), except in areas where inter-state commerce, or matters of law otherwise stated in the US Constitution are concerned. The former being the case, it would seem that it is well within the rights of the federal government to step in. (And this from a Southerner who still supports the Confederacy’s fight for State’s Rights 150 years ago).
Because I live in a state with a high sales tax, (California), but come from one with a moderate one, (Virginia), I know that the question is then one of whether the tax should be that of the state of origin or the state of destination. This I will leave to the elected officials on The Hill, as it would seem that there is no way that it can truly be 100% fair for everyone, every time something is bought or sold. However, there are already too many ways people are finding to avoid paying taxes, legally and otherwise, so to close this gap a little, by simply having people pay taxes on goods they are already purchasing, in states where they would already be taxed, is no great hardship or violation of our rights. It is, instead, an obligation we have as citizens, and the price we pay to have the services of the government we have.
This debate has stretched on for years. In 1999, Congress established a national advisory commission to explore this issue and the New York Times covered its activities in March 2000. State governors generally favored online sales taxes because they promised a revenue stream. National conservatives mostly favored an ongoing e-tax moratorium. It comes down to a clash of philosophies: “level playing field” versus “no new taxes.” At the time, I wrote about four principles to this issue that I believe remain germane in 2006:
One. An online sales tax loophole is regressive. Since the poorest people have the least Internet access, they have least access to this tax break.
Two. Policies in this debate were mainly influenced by telecom interests circa 2000. This is changing today, since multichannel retailers have a stake in promoting clarity and consistency on the issue.
Three. The traditional direct marketing and catalog sales industry has a stake in this debate as well, since they enjoy the sales tax loophole. If the law changes for online sales, DMers will be swept along.
Four. The only righteous principle for determining which sales tax jurisdiction and rate to apply for a given purchase is that the rule of the ship-to-address must apply. Any other scheme will cause online retailers to relocate to the Cayman Islands.
Collecting the accurate sales tax online and distributing the funds to the proper states and municipalities may seem complicated, but in fact there are already several solution providers who can handle the task as a plug-in to existing e-commerce sites.
Sales taxes are already the law of the land. This debate focuses on how we are to apply these laws in the virtual marketplace. I have little doubt that the “level playing field” will eventually prevail.
Unless consumers clearly see a benefit to collecting taxes on all online purchases, sounds like it could be a cause for more consumer activism directed at the states as well as Congress.
I think one point being missed is that not everyone shops online to avoid paying sales tax; the overall convenience and not having to put with mediocre customer service and it will arrive in a day or two.
Anecdotally, you end up paying about the same dollars for the item when shipping and handling are included so that appears to be a red herring for brick and mortars. Brick and mortars with good to exceptional customer service and selection are gong to thrive. It’s the marginals that are bound to fail sooner or later, regardless of e-commerce.
The only way I would be for this is that the e-commerce money goes to a very specific purpose and not into the general fund. Not like the smoke and mirrors of the state “Education Lottery.”
Online shoppers love saving sales tax, particularly for higher ticket purchases such as electronics. There are a few states that charge no sales tax at all (Alaska, Delaware, Hawaii, Montana, New Hampshire, and Oregon), and some of these would make fine warehouse locations for an online business to ship from nationally. But politicians generally don’t like imposing new taxes. Let’s see if the bricks-and-mortar retailers form stronger alliances with state and local governments to lobby successfully for sales tax equity.
I believe this is another lightning-rod issue because it touches on such issues as government fairness and effectiveness, personal freedom, and personal money. Hot topics indeed. Our research indicates that there are huge numbers of people in the US who feel that governments (state, local, federal) are bloated, inefficient, greedy, ineffective, and abusive of power. These feelings may not be baseless — for example, we have data that indicates that state and federal agencies operate at some of the lowest levels of efficiency we have ever recorded, and that the information processed by these organizations’ Fundamental Information Processes is valid less then 3% of the time. Astonishing, if you think about it.
The studies cited in this discussion do indeed say “…will lose…in uncollected taxes.” What the studies found is that there were amounts of taxes that COULD be collected that will not be, and then the studies called this “lost” money. This is entirely fallacious reasoning and borders on deceptive. Potential income is not lost income if it is not captured; money is only lost if you have it and then lose it. I believe this is just one an example of how poorly a topic like this is processed in general. The authors of the studies, and those who are using the studies to further their agendas, are making fundamental logical errors, which is almost always a sign, according to our research, of defensiveness, not mental incapacity.
We have a long way to go in having an effective process for dealing with issues like this in our country.
I think the simplest answer to the question about whether this is solely a state matter comes down to the obvious fact that most Internet transactions are interstate. You could have states battling it out over who gets the tax revenues (where it is sold versus where it is purchased for example) or you could work that out collectively across the nation. That by its definition is a federal matter. At least that’s my take on it.
This subject has been bandied about for almost 10 years now. On the one hand collecting sales tax might have a negative impact on sales. On the other hand that is a heck of a lot of money that is being left on the table. A question to be asked is “Why should Internet sales be treated differently from paper based catalog sales?” Why should Congress get involved? Isn’t this a states matter? Does Congress get involved in state and local tax collection of catalog sales? Doesn’t Congress have more pressing issues to contend with? Or is this easier than Iraq, corruption, minimum wage, health care, social security and ending pork?
This all depends on your philosophy on taxes. For myself, I prefer that taxes on activities be collected to pay for government services required to support those activities: building permit fees pay for the building department, park use fees pay for the parks, etc., etc. That doesn’t mean it is never appropriate to collect general taxes, with no direct relation to government services provided.
However, government employees (and there are more of those than ANY other kind in this country, about one out of three), on balance, overwhelmingly favor general harvesting of the population without the accountability of having to provide specific services for specific revenue. Moreover that huge block favoring collecting more taxes, any time, any where, are joined by a significant contingent of enablers/supporters from the non-governmental citizens, to drive relentless growth of the government machine, with ever more aggressive milking of the economic machine.
So what services do the local governments propose to provide to internet commerce? Not much. It’s just another honey pot that they lust after. I really don’t care so much about whether they tax internet commerce as I do about the fact that they will use the money to grow an even larger government. Much like my business advisor telling me that he wasn’t worried about leasing more space than we really needed, he was worried about me filling it with more people. :>)
In the same way, there is a relentless struggle between the productive, economic machine, and the overhead, governmental machine. For every dollar the overhead machine collects, it seems to need ANOTHER dollar to support its purposes. (Same thing happens in companies. :>)
Although I am not apocalyptic, I do recognize that there is such a thing as a tipping point in the relation between the two machines. From time to time the pro government forces succeed in so hampering the economic engine that their control is wrested from them and passed to those more fiscally disciplined. (And it’s obviously not totally a “party” thing.) Personally, I believe we have more government than we need, and ordinarily vote against every tax – but not always. I’ll be voting against any taxes on online commerce. Every business there is already paying many taxes that are simply unavoidable, we have such a tax web – payroll taxes, property taxes, etc., etc.
I am a bit surprised by several responses here. Are we simply arguing for our own self-interest? “Fair share”? Hmm, I suppose the 6 states mentioned without sales taxes are “unfair” to residents of the other 44 States?!? “Sales tax equity” — but you are not bothered that adjacent counties have different sales taxes currently?!?
Call centers are moved overseas because they are seen as more efficient, allowing services to be provided at lower cost. The internet may also bring other efficiencies — it saves me time, gas (and emissions) and parking. It enables our infrastructure (roads) to support an increased population. It may be like working from home — we don’t need as many office buildings and our houses are not empty 10 hours a day. It’s a new millennium and you can’t turn back the clock, however much you may not personally benefit from these changes. Remember, these tax dollars come from the pockets of our customers. Let’s focus on governmental efficiencies.