Mac Musings

Sales Tax on the Web

16 December 1999 - Daniel Knight

It's been almost two years since I addressed taxes on internet commerce here (see Internet Tax Freedom Act: A bad idea?). Then as now, many parties in the United States and around the world were asking the question, "Should the internet be a tax free zone?"

So far, at least here in the States, the idea of a tax-free internet is holding its own, but I don't believe it will last.

I don't think it can last.

After all, to stop collecting sales tax from its customers, all a business need do is create a web presence and take orders on the internet. Suddenly the same sales that would have been taxed become tax exempt.

It won't take businesses long to realize that, especially now that over half the U.S. population has internet access. For instance, what if you could buy a $20,000 car on the internet without paying 6% sales tax? Wouldn't you be more inclined to close the sale online?

Eventually we have to wake up and face reality: governments need money to do their job, and a tax-free internet will force governments to find new revenue streams.

In short, if they can't tax ecommerce, they'll have to tax you on something else to make up for the lost revenue.

For years the same problem has existed with interstate mail order sales. Living in Michigan, anything ordered from outside of Michigan is not subject to Michigan sales tax collection by the seller. (Yes, buyers are supposed to pay a use tax.) A lot of tax money falls through the cracks that way.

The states and federal government need to work together to create an equitable program for collecting sales tax on interstate sales.

My suggestion:

1. Interstate sales, whether via web, phone, or mail, would be taxed based on the laws of the state where the sale takes place.
2. Sales would be taxed at half the tax rate of the state where the seller is located plus half the tax rate of the state where the product is being shipped.

How would this work?

In states that don't collect sales tax, there might be no requirement for businesses to collect tax on interstate sales, since the laws of the state do not require the collection of sales tax. Sales shipped to states with no sales tax would be taxed at half the rate of the state where the seller is located.

But the bulk of sales would be taxed at the average of the sales tax of the seller's state and the recipient's state.

This would put an increased burden on companies selling on the web, via phone, or through the mail, since it would require them to collect, report, and disburse taxes for every state they ship merchandise to. But that's the cost of doing business if they choose to sell interstate.

There are several benefits to this proposal:

• Users are no longer expected to pay taxes on interstate sales.
• Local businesses are no longer at a disadvantage, since all businesses would be required to collect sales tax.
• Both the state where the sale takes place and the state where the merchandise is received collect taxes, albeit at a lower than usual rate. On the other hand, they are now receiving no sales tax income from these sales, so this is a big improvement.

This is a quick and dirty plan, not the kind of complex thing politicians are likely to devise. But I think it's a good starting point. It tries to be fair to local businesses and all states, without creating an undue burden for companies that choose to sell product across state lines.

Further Reading

• Internet Tax Issue Resurfaces Following Seattle WTO Fiasco, Charles Moore, Applelinks, 12/15
• Post Seattle, net tax wrangles continue, The Register, 12/14
• Will Euro taxes hinder Net growth?, ZDNet, 12/14.