Michael Mazerov of the Center on Budget and Policy Priorities (CBPP) has an 18-page paper out yesterday urging “all 45 states levying sales 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. es should adopt a version of” the Colorado use tax reporting law, or the yet-to-be-finished model statute based on it being drafted by the Multistate Tax Commission (MTC). The law is Colorado’s effort to collect sales and use tax on Internet-based transactions, since under current federal law only companies with property or employees in the state are required to collect 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. on transactions.
The Colorado law requires out-of-state companies that sell more than $100,000 in the state to (1) notify customers that they owe tax on their purchase, (2) mail a paper document to every Colorado customer each year listing their annual purchases and reminding them they owe tax, and (3) provide the Colorado Department of Revenue with a list of all Colorado customers and total dollar amounts purchased.
Mazerov’s piece reads more like an advocate’s brief than a careful analysis of the pros and cons of this path. Three points come to mind:
- Mazerov speaks of the MTC’s model statute development process as one where proposals are “carefully considered and fine-tuned by the committee’s legal, auditing, and tax policy experts from numerous states.” The MTC is a compact of just 15 states plus the District of Columbia, and its voting members are all tax administrators. In my opinion, developing model legislation is beyond their purview, especially since their insular process is usually devoid of meaningful feedback from actual state policymakers (legislators and governors) and taxpayers. Most MTC model statutes end up looking like laws written by tax collectors, because that’s what they are, and are never adopted by most states.
- Nowhere in Mazerov’s 18 pages does he mention North Carolina, a telling omission. North Carolina adopted a version of what Mazerov advocates that was challenged by the ACLU on privacy grounds and struck down by a federal court for violating the First Amendment. Why? Because, as in Colorado, the state requires sellers to send the state Department of Revenue a compilation of each customer’s transactions for the purposes of determining tax liability. The ACLU noted that “[e]ach order of a book, movie, CD, or other expressive work potentially reveals an intimate fact about an Amazon customer,” noting purchases by North Carolina residents that would be disclosed to the state included:
- Bipolar Disorder: A Guide for Parents and Families
- He Had It Coming: How to Outsmart Your Husband and Win Your Divorce
- Living with Alcoholism: Your Guide to Dealing with Alcohol Abuse and Addiction While Getting the Alcoholism Treatment You Need
- What to Do When You Can’t Get Pregnant: The Complete Guide to All the Technologies for Couples Facing Fertility Problems
- Outing Yourself: How to Come out as Lesbian or Gay to Your Family, Friends, and Coworkers
- Lolita(1962 movie)
- Brokeback Mountain(2005 movie)
- Fahrenheit 9/11(2004 movie)
In his paper’s Appendix on page 14, Mazerov does acknowledge the privacy concern but says it is “grossly exaggerated” for three reasons. First, he says that the Colorado law explicitly says that no information about the nature of items be provided to the Department of Revenue, although it’s cold comfort to know that “all” the Department of Revenue will know is that you bought several hundred dollars’ worth of stuff from an explicit website or psychological disorder self-help website. Second, Mazerov says sellers could avoid privacy issues by just collecting the tax instead, which does not so much refute the privacy concern as show the law can easily set up a situation where retailers must either collect a tax they are not required to collect or violate their customer’s privacy. Third, Mazerov says there are strong protections on inappropriate disclosure of taxpayer information, and that rarely happens. As familiar as I am with IRS data breaches and other recent privacy leaks of government-held documents, I am far less confident.
- Finally, it should be noted that a less one-sided approach is in the works. Congress is considering multiple bills to allow states to collect sales taxes on purchases from Internet retailers, while requiring states to simplify their sales tax systems to reduce compliance burdens. South Dakota has passed a law requiring use tax collection by all retailers, and this is a state that taxes all in-state sales they can (including services, exempted by nearly all states), and that law is winding its way to the U.S. Supreme Court next year. One or both of these approaches will be more successful than the Colorado approach.