Today is Cyber Monday, when employees return to work from the long holiday and will online shop to the tune of perhaps $1 billion. For some online purchases, consumers will have sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. added to their bill but for most purchases it will not be. Why?
Mostly it’s about the limit of state powers. Without some restraint by the courts or the federal government, states have an incentive impose their full taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. on every transaction connected with it in any way. If I buy something from another state, which is fulfilled by a warehouse in yet another state, with the delivery truck driving through 6 states, what state gets to impose its sales tax on the sale?
The U.S. Supreme Court has ruled that, to prevent disruptions to interstate commerce, a state may force only those businesses with a “substantial connection” with the state (“nexus”) to collect its sales tax. Otherwise, the Court held in its 1992 case Quill Corp. v. North Dakota, businesses would face an enormous burden of complying with over 8,000 separate sales tax jurisdictions, with ever-changing bases and rates. Thus, only businesses with employees or property in a state usually collect a state’s sales tax, even if the employees or offices are not directly involved in soliciting sales in the state. Simply put, the Supreme Court’s current position is that Commerce Clause requires a substantial level of contact between the state and the thing or person to be taxed.
State tax administrators and champions of higher state spending are displeased with this status quo. Every state with a sales tax also has a “use” tax, a tax on the use within a state of an item upon which a sales tax has not been paid. (It appears on many state income tax forms.) Thus, states with less competitive tax systems than their neighbors seek to tax transactions occurring in other states to equalize tax burdens — essentially a protectionist measure.
But officials know from political and administrative experience that use taxes are practically unenforceable, and the only other way to get the revenue — forcing out-of-state companies to collect the taxes — has been severely limited. Brick-and-mortar retailers have also claimed unfairness at their having to collect sales tax while their online and out-of-state competitors escape the same obligation. Of course, the proposal on the table is to impose a greater obligation on out-of-state and Internet companies: force them to collect thousands of different sales taxes, while brick-and-mortar retailers need to track only one.
What matters more – that states have limited ability to export tax burdens and disrupt the national economy with a patchwork of taxes and compliance costs – or that identical items be equally taxed no matter where they are purchased? It’s an issue we will continue to track here. In the meantime, happy holiday shopping!
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