Tax This

Recently I received a letter from the state of California^[1] informing me I needed to create a use-tax account. For those of you who aren’t familiar with a use-tax (I wasn’t), a use-tax is the sales tax you owe for anything purchased outside the state of California. Most every state in the union has laws regarding use-tax. And the use tax also includes anything purchased online.

In case we haven’t met, I’m a bit of a technology dork. I do basically all of my shopping, outside of clothes, online. I’m an Amazon Prime customer. And I will admit the biggest reason after convenience I shop online is to avoid sales tax. Or at least I thought, like I’m sure most people did, I was able to avoid sales tax by shopping online.

The reason this is becoming an issue is states are increasingly facing smaller tax revenues and it’s nearly impossible to raise taxes as that takes, well, an act of Congress. States are looking for anyway to increase cash-flow and it only makes sense for them to go after every possible resource. The problem they face is enforcement. Essentially it’s all self-reported. And attempts to go after online retailers to find out about customer’s purchase history can be challenging if not completely unsuccessful. In order for a state to have any chance of collecting anything more than a small fraction of the taxes owed to them the online retailer would need to start collecting the tax like a normal brick and mortar store. Enforcing such rules, and requiring online retailers to navigate through 40+ different sets of rules for sales tax, would border on the impossible.

Here’s what I propose instead. As the current law stands, online retailers are required to collect sales tax for any state in which they have a physical presence. Keep that law in place. But for any sale that takes place where the above condition isn’t met, the federal government should place a 5% sales tax on that sale. Since the sale would qualify as interstate commerce it is subject to federal laws. Of that 5% collected, 1% goes to the federal government, and 4% goes to the state in which the customer lives. While 4% is almost certainly less than the state would have collected normally, it’s still much more than they are currently collecting or would have any reasonable chance at collecting. The 1%, while not earthshattering, would certainly help a nation languishing in debt.

In the past I’ve always been opposed to taxing online sales as I feared a tax would discourage online commerce and kill an infant industry. Today shopping online is as commonplace as using an ATM, and a relatively small tax won’t have a noticeable effect on the industry. States, while not collecting the full amount, would still increase their income. The federal government would see a new source of income. This is a compromise that works for everyone.

^[1] It’s really impossible for me to type or say the name of my state without hearing my soon-to-be former governor saying it in my head.