Posted by: nickgerlich | April 11, 2008

Taxing Situation

‘Tis the season.

Yep, it’s that time of year again. Federal and state tax returns are due on the 15th, which means as of this writing we have four days to come clean and get out the checkbook.

Oh, and by the way, if you happened to have purchased anything online or via mail or phone order from out-of-state vendors, you’re supposed to be an honest guy and send your state some sales tax money.

TaxesHow’s that again?

Technically, aren’t e-commerce and mail order given a hall pass when it comes to taxing out-of-state customers? Yes, they are…kinda. According to an MSNBC.com article posted yesterday, states are getting more and more antsy about all the lost sales tax revenues resulting from our propensity to buy things from vendors nowhere near our home state.

How big is the shortfall? Pretty big. If 2008 online sales reach roughly $200 billion, as they are predicted to do, and assuming a sales tax rate of 6%, it means there’s about $12 billion in potential sales tax revenues floating around in cyberspace. In reality, that number is likely much higher, because 6% is a rather low sales tax figure these days.

And every governor would like to get his or her hands on their share of it.

Some states are now trying to put pressure on e-commerce sites, urging them to collect the sales tax even though they may not be required to do so. And some states “require” citizens to report their out-of-state purchases and send money. It’s called a “use tax” when you buy something online or via mail from an out-of-state retailer, but a tax by any other name still smells the same.

While I understand the governors all drooling over the prospects of revenue enhancements, the fact of the matter is that relying on citizens to volunteer their sins of omission is probably not going to result in much gain for the states. And requiring vendors to keep track of a multitude of tax rates for states and counties, and then remit those monies, is simply unrealistic and not fair to them.

Take for example our fair state. While our base sales tax rate is 6.25%, municipalities and counties can add their own taxes, up to a maximum total of 8.25%. Texas retailers are supposed to follow a lengthy list of all these various taxing entities and then submit their sales tax revenues accordingly. It is a bookkeeping nightmare.

So what’s the answer? Simple. A federal VAT (Value-Added Tax) that is assessed across the board for online and mail order purchases. But even this has its problems, because someone would have to determine how the funds would be distributed to the states (once again, I bet the burden of reporting would fall on the retailers).

Which leads me to my “ideal world” recommendation: a combination of state sales tax and federal VAT, and a corresponding reduction in or elimination of federal income tax. If you buy, then you pay. If you don’t buy, then you don’t pay. It would be a consumption tax.

While I take advantage of the current tax loophole allowing me to shop online tax-free, I realize that its days are numbered. The time is coming when everyone will pay sales tax on every purchase. I just hope that the “solution” is one that is not burdensome on retailers to administer. The last thing we need is an unnecessary complication of something as simple as a retail sale.

Dr “Hug Your CPA” Gerlich

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