Thursday, January 14, 2016

Internet sales tax

Internet sales tax just makes no sense.  It is simply another version of interstate sales tax which also makes no sense.  The simple solution is to pay sales tax where an item is sold (it is called "Sales Tax" after all) and be done with it.

Let's look at the edge cases which are often instructive in revealing issues and problems.

1. Let's say you are traveling outside your home state and you have a flat tire.  You buy a new tire, paying sales tax in the jurisdiction where you purchase the tire, and drive home.  Do you now owe additional tax to your home state for that product (the tire) you brought into the state?  If so, haven't you been double taxed?

2. Now let's look at the exact same transaction slightly differently.  What if I live in another state and I'm now in the process of moving to my new state. During the trip, while still in my previous state of residence, I have a flat tire.  I buy a new tire in my old state and then drive across the line into my new state.  Do I owe sales tax to my new state of residence?  How is this any different than the example above?  What if I bought new tires a day (or a week, a month, a year) before I moved?  Does that change the answer?

3. What if I buy a burger at a fast food restaurant just over the state line on my way home?  Do I owe tax to my home state when I get back?  Does it matter if I consume the burger before or after I cross the state line?  What if I stay out of state for several days (thus the food is consumed, processed, and completely 'used' out of state)?

4. Do I owe sales tax to my home state on gasoline that I purchase during a trip to another state? What if I bought that gas just before crossing the line into my home state?  What if all of the gas is used in the other state?  What if only 1/2 the gas is used outside the state; do I owe sales tax on only the 1/2 I brought back?  What if that gas is only used in a rental car that stays entirely in the other state?

5. What if, during a car trip in another state, I have my oil changed and I bring that new oil back into my home state (in my crankcase)?  Would it be any different if I bought a case of oil in another state and brought it home to change my own oil?  Do I have to pay sales tax to my home state on both the oil and the service or only on the oil portion of the transaction?  What if my home state doesn't tax services, only tangible products?  What if I drove 2000 miles (of the 3000 before I need another oil change) out of state; would I only owe on 1/3 of the cost?

6. What if I purchase a service in another state (say a massage or a car wash)?  Do I owe tax on the service that was entirely performed in the other state?  What if my state doesn't tax services?

7. Let's say my home state doesn't tax a particular class of item (food for example).  If I buy that item in another state do I still owe sales tax to my home state for the out-of-state transaction? If the other state does tax that class of item am I owed a refund from my home state (turn about is fair play, right)?

8. Compare this to adjacent cities with different tax rates.  Do I owe sales tax to my home city if I buy something in the next town over?

There are numerous other edge cases as I'm sure you can see.  These cases make it clear that interstate sales tax just makes no sense whatsoever.  There are an equal number of edge cases that apply to internet sales tax which is really no different.

In addition, there is no way to get 'credit' for the taxes you did pay at the point of sale.  Thus, any interstate taxes you pay constitute double taxation which is also unfair.

The argument made by proponents of this scheme is that the transaction takes place "at" the user's browser & therefore in the user's home state. If that's true, doesn't every internet merchant need a business license in each city? That's only fair, right? They have a sales presence in each home, right? Of course that's just ridiculous. As ridiculous as internet sales tax.

The basic concept of sales tax is to pay for the costs of doing business in that area (infrastructure, police, fire, building inspector, etc.).  Since you are using none of those infrastructure bits in your home state when you buy something out of state, it makes no sense to pay tax to your home state. Further, the state, county, & city that actually did pay for the infrastructure supporting your transaction got paid nothing. Not to mention that your home county & city get no tax revenue, just the state.

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