Internet Taxation 03/18/2007

A not so simple sales tax

I recently did a Capitol Hill briefing for Congressional staffers on the arcane subject of Internet sales tax, including the so-called Streamlined Sales Tax Project (SSTP).


Before diving into the indecipherable details of the SSTP, I shared with audience an analysis of my own online shopping experience this past holiday season.


I bought at 14 different websites, ranging from Amazon to L.L.Bean to RestorationHardware.com.  And 12 of these 14 web retailers automatically collected my Virginia sales tax, covering 95 percent of my online purchases.


That shouldn’t be a big surprise, since current law already requires websites and catalog retailers to collect sales taxes for any state where the business has a physical presence.   But, in fact, my experience did turn out to be quite surprising to some in the audience (and to one of my fellow panelists!) They thought that all Internet purchases were somehow exempt from state and local sales tax. They assumed that the federal moratorium on Internet access taxes also covers sales tax on purchases made online. But Internet access taxes and online sales taxes are two entirely different things.


And why didn’t those other two sites collect my Virginia sales tax?  Because back in 1992, before e-commerce had even been invented, the Supreme Court ruled that state sales tax systems are so complicated that they represent an unconstitutional burden on interstate commerce. Thanks to that ruling, states can’t force catalog sellers and e-commerce sites to collect local sales taxes unless the seller has a physical presence in the state.


State and local officials, always hungry for new sources of revenue and imagining a huge pot of gold at the end of the Internet rainbow, are now trying to get around that Supreme Court ruling by creating the SSTP in an effort to standardize and simplify their sales tax systems.


But simplifying local sales taxes is turning out to be anything but a simple process. So far, only 15 states have implemented the changes. The rest are figuring out that "simplifying" their sales taxes can’t possibly generate enough new revenue to justify the complicated changes and increased cost of collection required by the SSTP.


Seeing what’s been going on around the country, SSTP proponents are getting anxious. They want Congress to step in and require that sellers everywhere (even those in states that don’t even have a sales tax) start collecting sales tax for any state that meets the SSTP standards.  But, in addition to being complicated for the states to implement, the "simplified" SSTP system will be enormously burdensome and expensive for online retailers, especially small businesses trying to reach larger markets through e-commerce.


And what about that five percent of my holiday purchases on which the online retailer didn’t collect my sales tax?  Well, it may surprise you to learn that state law says that when I buy something from a website or catalog that isn’t required to collect local sales tax, I’m supposed to pay what’s called a "use tax" instead.  Not to worry. That also came as a big surprise to many in the Hill audience. I guess they haven’t been volunteering to pay their use taxes either!


I expect that a lot of people will be just as surprised as those folks on Capitol Hill when they figure out just how complicated it really would be to “simplify” sales tax collection.


I hope  those Congressional staffers were listening carefully.
 

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