Laffer and the online sales tax, Pt. 2
posted at 9:31 am on July 21, 2013 by Jazz Shaw
Yesterday’s discussion of the Marketplace Fairness Act, as well as Arthur Laffer’s editorial on same, certainly sparked a lively discussion. It not only delivered a lot of feedback and links in the comments, but discussion on Twitter and e-mails coming in from interested parties on both sides. As promised in a later update, it proved very educational (at least for me) and I’d like to highlight a few of these for further discussion today. These include two of the most frequent points made in the forum here and two e-mails we received, one from a business owner and one from a rural, online shopper.
Item 1: This is a point brought up frequently by readers, but this particular comment seems to sum it up nicely.
I’ve never understood why internet sales taxes aren’t simply charged in the SELLER’s locality? Treat it as though the consumer is coming to the seller, rather than the somewhat more absurd notion that the seller is building a tiny little shop in each consumer’s living room.
This has the added advantage of letting states compete for big retailer employers by keeping their sales taxes low.
SoRight on July 20, 2013 at 11:42 AM
This is a pretty good argument, and honestly I can’t think of a single reason which contradicts it. An admittedly cursory search didn’t turn up anything which would make such a proposal illegal, but this may vary from state to state, so we’d need to check in with some legal experts. But essentially, this correlates to the fact that many people travel across state lines and purchase things. If there is a sales tax in that state, they pay it at the cashier, the state collects the revenue and the person later returns home with their purchase. How is the retailer supposed to keep track of the home state of every person coming in to pick up a box of diapers? They can’t. So why not treat online sales the same way? I suppose the governors are arguing that they aren’t getting their share of the tax revenue when their residents shop online from e-retailers who are based in other states, but what do they do now about people who cross state lines and shop? I understand there are limits placed on how many of certain items – such as cigarettes – you can bring home over state lines, but isn’t that a different debate?
Item 2: Some of our readers repeatedly brought up a constitutional question.
US Constitution, Art. I, Sec. 9:
No Tax or Duty shall be laid on Articles exported from any State.
It pertains to all governments in the US and all branches thereof.
It is not part of a State restrictive Section, either.
ajacksonian on July 20, 2013 at 2:55 PM
When I checked on this one, the argument seems to run into a few problems. Article 1, Section 9 is collectively known as the “Limits on Congress” section. Remembering that the document was written when the nation was envisioned as a looser collection of powerful, more independent states, it would seem that the Founders were concerned about trade between the states (much like trade between nations) and between the many states and other nations. It restricted Congress – i.e. the Federal government – from putting any form of duty or tariff on good “exported” from any of the states. The MFA doesn’t deal with a federal tax, but rather giving permission for the individual states to levy a tax. Now, my best constitutional sources found two cases where this clause was invoked, but they both dealt with exports from a state to a foreign nation. I’m prepared to be proven wrong if anyone has conflicting references, but thus far it looks like Article 1 Section 9 does not apply to the MFA or any state levied sales tax.
Item 3: Online retailers have expressed many concerns. Following is a response from one such person who contacted Hot Air after the original piece was published. Rick Smith is a small business owner and member of emainstreet.org.
$1 million in sales sounds like quite a bit but frankly, it isn’t. None of these family-run businesses I spoke with are in any position to retire. And these new burdens and costs are enough to put some under. Even Avalara, a major tax cloud services company has this in a whitepaper from a couple months ago: “Considering the already impenetrable maze of sales tax collection rules, businesses face an uphill battle this year. Sales tax compliance in 2013 requires more resources and expertise than most small to midsized businesses possess.” – Sales Tax Survival Guide 2013, Avalara. Page 1.
“and the bill requires that free software which calculates the tax for other states must be provided for those complying“. Yes it does. But as one of our groups founders states “it’s free like a puppy is free“. Every state is free to choose any method of “free software” to provide. Costs of complying with this can’t even be fully computed by my small company now because even industry leader Avalara can’t actually handle our fairly simple setup. They can do very simple calculations for our Yahoo shopping cart, sure. But they can’t do anything with the other types of orders and all other business processes related to order processing. It’s far more complex that people state, and if they state otherwise they either are lying or just quite simply don’t understand business processes. There is no free solution here in the real world. Just in theory. The time and actual costs initially and every year are more than we can handle. It’s a gold mine for the tax providers.
More importantly, I’m terrified about the audits. We quite simply can not handle up to 45 states auditing us in any given year. Small business owners wear many hats. Responding to information requests and audits would become a full-time job and one we again, could not handle. MFA only holds a business owner harmless if the free state software computes something wrong.
This covers three different points, some of which also came up in comments. First is the definition of “small business” in this bill. I’m convinced. $1M in sales rather than profits is very different and it looks like it could sweep up a lot of struggling small businesses.
The software question is a bit more murky. There certainly is a lot of verbiage in the bill which seems to do back flips to ensure that the software is not only free, but able to provide the needed information for any sale to any state. But I take Rick at his word, particularly since each state will implement it differently and there are probably holes in those protective clauses you could drive a truck through. Again, I’ll defer to some lawyers on that one.
The last one, about the audits, though, seems to be covered pretty specifically in the bill.
implements each of the following minimum simplification requirements:
(ii) a single audit of a remote seller for all State and local taxing jurisdictions within that State; and
(iii) a single sales and use tax return to be used by remote sellers to be filed with the single entity responsible for tax administration.
A State may not require a remote seller to file sales and use tax returns any more frequently than returns are required for nonremote sellers or impose requirements on remote sellers that the State does not impose on nonremote sellers with respect to the collection of sales and use taxes under this Act. No local jurisdiction may require a remote seller to submit a sales and use tax return or to collect sales and use taxes other than as provided by this paragraph.
If Rick starts getting hit with 45 audits – or even two – it sounds like somebody in his state is breaking the law. But if I’m missing something in reading that code, let me know.
Item 4: This one deals not with sellers, but with shoppers, and comes to us from Rich Scheuerer of North Pole, Alaska. (Yes, there is such a place.) His concern is specific to rural online shoppers in states with no sales tax.
I have read your sales tax article at Hot Air and I am going to say that the little people in rural areas are going to get screwed big time. I live 6 miles outside the city of North Pole, Alaska (yes, there is a North Pole where Santa Claus and Kris Kringle lives year-round.). Alaska is a no income tax and no state sales tax state except for small city sales taxes. The city of North Pole has a sales tax which everyone tries to avoid by buying gas (the three gas stations charge $.30 more per gallon than Fairbanks and the two refineries are two miles away-another story) and food in Fairbanks 12 miles away. The problem is that the people that live outside the city of North Pole have the same zip code as the city of North Pole. Companies will practice zip code taxation on us and we rural outside the city limit dwellers will be illegally charged sales taxes. Even if the companies get software to identify tax areas, they won’t have a GIS/Google Earth component to identify non-taxable areas so we will get taxed. It will cost a lot of time and money to get our illegally paid taxes back.
Rich brings up a couple of interesting points, but I’m not sure his specific situation applies to the discussion of MFA. As I read this, the MFA will allow states to collect taxes on sales, not municipalities. If Alaska has no state sales tax, then they wouldn’t be able to collect anything from the e-retailers, would they? And, as such, the retailer would not be able to charge Rich a tax on the product at the time of sale. Or am I misunderstanding that part?
But this does tie back into item one above. If we were to change the concept of MFA so that the retailer simply charged everyone a sales tax based on the state where the seller is located, what of the people who live in states with no sales tax? I suppose this is the other half of the double edge sword from my answer to that item. It seems as if it would be treated the same as if Rich were to leave Alaska, travel to California (or wherever the seller is based) and buy something. Of course, this would discourage sales in states with no sales tax, but as so many of you have pointed out, any increase in taxes will result in some decrease in economic activity.
You are free to discuss.
UPDATE: (Jazz) I completely forgot one of the most cited comments in the original thread, which was meant to be Item 5 originally. My apologies. That was the point that Laffer’s argument of the benefits of the state collecting sales tax relied on the state also lowering income tax and other fees, producing a net wash of revenue while flattening the tax burden. This, of course, relies on the state actually lowering those other taxes to be true. And given our recent history, except in a handful of very conservative states, that’s pretty much a fantasy. I completely agree and acknowledge that, noting that I left it out of the original article entirely. The point was well made by many readers here.
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