The Online Sales Tax: Legitimate or Boondoggle?

The Online Sales Tax: Legitimate or Boondoggle?
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Taxation Without Going Into the Store Is Tyranny

The advent of the Internet into our homes less than twenty years ago brought changes to the way we did things—a heck of a lot of

things, at that. From setting up email accounts and joining chat rooms, we moved quickly into research on products to use for our homes and businesses. Then we discovered the wonderful convenience of buying those products online with sellers conveniently shipping them directly to our doorsteps. And, incidentally, the sellers charged us no sales tax.

But wait! When you buy something, you’re supposed to pay some kind of sales tax on it, right? Since 1967, the US Supreme Court has maintained that a vendor cannot be taxed by a state if it has neither employees nor real estate in that state. Legislation proposed in 2011, after a case called Quill Corp. vs. North Dakota, will put an end to tax-free Internet purchases. And that just doesn’t seem fair! Let’s take a look at how we got there and whether this proposed legislation is some kind of government scheme.

But What to Tax?

Deciding what to tax has always evoked controversy. In Pennsylvania, my home state, taxes were charged on everything except food, MFinderup

and clothes. When I moved to Ohio I was surprised that even those items were taxed, but there were some exceptions. For example, if you bought something to eat at your local Mickey D’s you paid tax if you ate it in the restaurant. But if you took it out, you did not pay sales tax. One restaurateur told me that the tax was on the service provided for in-the-restaurant service.

A little over five years ago, Ohio joined other states participating in a Streamlined Sales Tax Project (SSTP), established to create uniform taxation policies from state to state, especially in view of the massive increase in Internet vendors. The 24 states that have joined this tax project include Arkansas, Georgia, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Vermont, Utah, Washington, Wisconsin, West Virginia and Wyoming.

While most citizens remain blissfully unaware whether or not their states participate, strange new laws have evolved. In Ohio, coffee sold without sweetener cannot be taxed. Coffee sold with sweetener (or any kind of sweetened soft drink) is taxable, because adding sweetener actually makes it a food. Yes, I’m telling you it’s true. Plus, all food vended from machines is exempt from sales tax in all participating states. I guess nobody figured out a way to manufacture a vending machine that shakes people down for that extra 7 cents.

Never mind the efforts people put forth to evade taxes at any cost. Ohioans living near Pennsylvania eagerly drive over the state line, linder6580

to buy clothes and save six or seven bucks per hundred dollars spent. Nobody talks about the extra money they’ve spent on gasoline getting there or the cash doled out at (tax-free) restaurants along the way. In the meantime, the SSTP did little to assuage the owners of brick-and-mortar stores who complained that they held an unfair burden of collecting taxes for products that their Internet brethren vended tax free.

Also, once a vendor opened a store within a state or even sent sales reps, its goods became taxable. NOLA gives the hypothetical example of Margo, living in Indiana and buying orchids tax-free from a vendor in Vermont. However, if the vendor in Vermont opens a store in Indiana, when Margo orders her next batch of orchids from Vermont, she has to pay taxes on them because the vendor has a storefront in Indiana. This situation is entirely within the parameters of Quill.

Several states, including New York and, yes, Ohio, make every effort to collect sales tax from people who buy goods from Internet vendors. The Ohio individual income tax instructions ask you if you have made Internet purchases without paying taxes, and if so you must calculate your sales or use tax debt and add it to your total taxes due. It adds up to big money, folks; the Streamlined Sales Tax Governing Board (SSTGB) reports that general sales and gross receipts yield almost 32 percent of all state taxes collected, second only to personal income tax. (By the way, our personal sales taxes used to be tax-deductible, until the tax changes undertaken by Ronald Reagan way back in the 1980s.)

And so, doing what they do best, several congressmen banded together to create a uniform tax so they can make some money on your purchases, no matter where you or your vendor reside. The Main Street Fairness Act’s writers based it on the Supreme Court’s invitation to Congress, at the end of the Quill ruling, to legislate a sales tax for non-local vendors.

The Nuts and Bolts of the Main Street Fairness Act

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The proposal calls for tax to be collected on items delivered to buyers in the state where they receive the goods, whether the purchase is made in person, by mail, over the telephone or using the Internet. It requires the participation of at least ten states “comprising at least 20 percent of the total population of all States imposing a sales tax." The states that are members of the SSTGB have surpassed that, and more states plan on joining (Texas, Massachusetts, Florida, Illinois, Virginia, Missouri, Maine, California and Hawaii).

Once a state gains member status, it can begin collecting taxes on the first day of the quarter that falls at least six months after it gains member status. But before anyone collects even a penny, all member states must guarantee:

  1. A centralized, one-stop registration system for sellers that promises privacy and prohibits the system’s use for any other purpose.

  2. Uniform definitions of the products being taxed or those being exempted.

  3. Uniform rules for sourcing transactions to specific jurisdictions.

  4. Uniform procedures for certifying tax collection software or certified tax collectors.

  5. Uniform rules for rounding and for handling bad debt.

  6. Uniform requirements for tax returns and remittances.

  7. Consistent electronic filing and remittance methods.

  8. A single, state-level administration of all state and local taxes, including the method for filing returns.

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  9. Elimination by each member state of caps and thresholds on taxes.

  10. Completion of a tax matrix by each member state.

  11. Relief from liability for vendor errors based on misinformation from the member state.

  12. Audit procedures for sellers.

  13. Compensation to sellers for the expense of reporting. No limit is set on what amount the states can compensate the sellers and can include third-party sellers.

  14. Privacy for consumers.

  15. Uniformity of procedures.

  16. Uniformity of exemption for small businesses.

  17. Uniform rules and procedures for sales tax holidays.

  18. Uniform rules to address returns, restocking fees, discounts and coupons, as well as allocations of shipping and handling discounts allowed for multiple purchases.

The Problem With This Bill

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There’s something to be said for a way to raise taxes that just pinches a little extra out of our pocketbooks as we go about buying our new toys. The Streamlined Sales Tax Governing Board claims that member states have realized additional tax revenue from 1,400 compliant companies of over $700 million. In these times when counties and municipalities have difficulty keeping roads and bridges safe, it doesn’t seem like too much to ask.

But there’s just a lot about it that bothers me!

First, have brick-and-mortar store owners really been moaning and whining about being used unfairly as nothing more than show windows for Internet vendors, the way legislators claim? I don’t think so. After all, any time a retailer gets a customer into the store, the potential exists for some kind of purchase, even if it’s not the item the person originally came to see.

I also have a problem with the language in Section 6, subsection c: “Nothing in this Act or the Agreement shall require any Member State or any local taxing jurisdiction to exempt, or to impose a tax on any product, or to adopt any particular type of tax, or to impose the same rate of tax as any other taxing jurisdiction.” And prior to that, it tells us “The States have experience, expertise, and a vital interest in the collection of sales and use taxes…” Oh, give me a break!

Quill protected Internet and mail-order vendors from taxation on the grounds that the tax monies assessed could not possibly assist the vendor’s industry since the state and the vendor shared no physical connection. There was therefore no way for the vendor to benefit from the taxation.This new law will fly in the face of that.

All the hue and cry about the “local retailers” is just so much smokescreen created by states looking for ways to get more of our hard-earned money—and reward someone who has more money than the average guy, just as the Washington, D.C. taxi commission did earlier this year making taxi drivers buy medallions in order to stay in business: There’s usually some overriding benefit in it for the corporate honchos. This law just sounds a little too much like a free back rub for somebody, especially since there is a mechanism for compensating sellers—including third-party sellers—for the cost of compliance.

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Just like the Ohioans who spend extra money traveling to Pennsylvania to buy clothes, so do consumers spend more money logging onto the Internet. The costs of shipping and handling certainly offset any money saved on state taxes. However, I worry that taxes on shipping services (see number 18 above) could result in even higher taxes on a product.

So, we move unrelentingly forward toward taxation on Internet purchases. It may be a year or two before all qualifications in the bill are met and even longer while challenges to the bill play out in the courts.

Consider whether your energy would be better spent seeking some adjustment in just exactly what’s taxed where you live. I like Pennsylvania’s practice of selling clothes and food without taxing them. After all, those who live on the smallest incomes aren’t really worried about buying fancy extras on the Internet—they’re just struggling to get those basic necessities. And they shouldn’t have to pay taxes on that kind of stuff, no matter where they buy it. Meanwhile, I’ll see you at the vending machine, and bring your own sugar, just in case.