It looks like tax-free internet shopping will soon be coming to an end. Actually, many states require individuals send sales tax into their state when they buy something from a catalog or the internet, but few people do and most states don’t have the stomach to aggressively ask, so internet shopping has effectively become tax-free. States instead have required that retailers that have a location within the state collect sales taxes from that state’s residents but no others. States have seen a large loss of revenue because of this, and retailers are seeing shoppers use their stores as a showroom and then buy the items online.
As online stores like Amazon grow, they are slowly expanding into every state and realize that they will soon need to collect sales tax virtually everywhere anyway. Seeing the writing on the wall, they have started to support state efforts to require retailers to collect sales taxes whether they have a presence in a state or not. Amazon and other retailers realize that they can give themselves a competitive advantage since they have the resources to collect taxes but their smaller competitors don’t. Often a big company will welcome costly regulations and reporting burdens since it keeps others from entering the markets. This is not good Capitalism.
Free enterprise works better when it is free. Most of the things people say is wrong with Capitalism is actually due to crony Capitalism – where companies use politics to gain an advantage rather than gaining market share by providing a better product or value. Pure Capitalism has lots of competitors and low barriers to entry. More competitors mean more efficient processes as everyone tries to cut costs. More competition means better service since companies want to attract and keep customers. It also means better jobs because there is competition for great employees. Probably the worst thing for free enterprise is costly regulations that keep new companies out and raise prices since the costs of compliance are just passed along to the consumer.
It is probably fair that purchases made online be taxed just as purchases made in stores are taxed. This would allow sales taxes to be lowered since the tax burden is paid by more individuals. It is estimated that states could collect about $500 million more in sales tax if taxes were collected on online purchases, which would allow states to lower taxes by 3-4%.
It is unreasonable, however, to place the regulatory burden on small and midsized businesses to pay sales taxes to each of the 9600 some odd localities and be subject to up to 9600 audits each year. Even the current proposal, where they would pay taxes to 50 states and be subject to 50 audits is not reasonable. Imagine just needing to fill out 50 forms each month and send 50 checks, let alone spend 100 weeks of man-hours a year (two people full-time) complying with 50 audits. People have better things to do. It is also not fair, however, for some businesses to collect sales tax and others not to.
The solution is simple. If you walk into a restaurant in New Hampshire when you are on vacation from Texas, you don’t expect the restaurant to send the sales tax you pay back to your home state. You expect them to send the money to New Hampshire to pay for the police, roads, and schools that the business relies on to operate. Likewise, why should an online store in New Hampshire send sales taxes to Texas just because the buyer lives in Texas? They should collect New Hampshire sales tax since they are located in New Hampshire. (OK, New Hampshire does not have a sales tax, so this might be a bad example, but you get the idea.)
If businesses collected their state sales taxes instead of trying to collect and send taxes to each state based on the location of the buyer, it would be one check a month and possibly one audit each year. It would be very easy for anyone, from an Amazon to a one-woman business selling pot holders on Ebay to comply. It would encourage states to lower their sales tax to be competitive at attracting online businesses. It would avoid all of the costly compliance that would waste time and money and drive up prices.
Unfortunately, the current law going through Congress would have sellers collect sales tax for each state. They do exempt businesses with under $1 million in sales, but that really isn’t fair either. It would be so simple to get it right. Let your representatives know how to do that.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.