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I’ve described how over the last dozen years or so I’ve converted from an Amazon.com dissident to an Amazon.com fan. Although for most of my purchases I check prices against brick and mortar competition, other stores, for the most part, can’t compete with Amazon.com in terms of price. I’m also lucky enough to live in a state where Amazon.com doesn’t have a physical presence. I can therefore avoid New Jersey’s 7 percent sales tax on purchases, though technically, I must repay this benefit as use tax when filing my personal income tax return.
In theory, the use tax should be how the state recovers at least a portion of lost revenue from sales made within the state with out-of-state businesses. The use tax just isn’t very efficient, and many states have determined that online sales transactions with the customer residing in those states, regardless of where the business is located, should have sales tax. New York is one such state; I’ve had friends living in New York, a state where online purchases are taxed, ask me to accept deliveries for them at my home in New Jersey to avoid hundreds of dollars of sales tax payments on large purchases.
Sales tax is an important form of revenue for the states in which a sales tax is collected, and this revenue is used to pay for public education, infrastructure, and government expenses, in addition to the vast majority of sales taxes’ use for general expenses. With an increasing number of sales transactions moving online, and the ability for companies to operate anywhere in the world while serving customers in every state, the idea that a company must have a retail “presence” in the same state as the consumer is antiquated. If I can access Amazon.com from New Jersey, Amazon.com has a presence in the state. It may not be a storefront, but I can buy products from their store without crossing the border into a different state.
Speaking to business owners, I am aware of the problems with the concept of business charging sales tax for every state. This creates an accounting nightmare. Although there are only 50 states (and only 46 with sales tax), there are hundreds of different tax situations. Some cities or other municipal areas charge sales tax in addition to the state tax, and in some cases, sales tax rates differ according to the type of product being sold or the business status of the consumer. Computer software can make determining the correct tax rate easier, but relying on the software without a back-up system is problematic.
States regulate commerce, but commerce has become such an integrated part of the human existence, with an increasing portion of business being conducted across state lines. The system of collecting state taxes should be upgraded to deal with this new reality. Perhaps there should be one entity collecting a base sales tax on all items, and this one entity determines which state should receive the revenue, based either on the location of the buyer, the seller, or both.
Perhaps all state sales taxes should be eliminated completely, with the intent of using state income tax to recover the revenue shortfall. Sales taxes penalize consumption, and they hurt low-income households as a percentage of their overall income than they hurt higher-income households. You can claim a deduction for state sales tax paid when filing federal income tax returns, partially offsetting the regressiveness of a consumption tax, but that requires itemizing deductions. Itemizing deductions may not be worthwhile for most taxpayers unless they can itemize beyond the standard deductions.
I’m not aware of a perfect solution — something that eases the accounting burden on businesses while allowing states to collect revenue on all transactions even partially occurring within their borders. With online commerce, the concept of a state is irrelevant. Other than having one entity collect taxes for online purchases on behalf of all states, state and local governments must find a way to recover the revenue they’re losing as more transactions take place online. Relying on consumers to file accurate state tax returns including an assessment of the purchases they made without paying state sales tax — the use tax — is foolish.
Does your state expect you to file and pay use tax? Do you file and pay this accurately each year (or in the case of at least one state, each month)? How should states collect revenue for online sales?
Photo: Tim Dan!el
Updated June 20, 2014 and originally published August 1, 2012.