What if we Turned Internet Sales Tax on its Head?

While no one really likes taxes, except perhaps the government, we are coming to a point where internet retailers are going to have to collect some form of sales tax.  With the pressure from the government, eventually it is going to happen.

The Problem with the Current System


The problem is that there are 50 different states with 50 different sales tax schemes and rate schedules, and the states can only legally require residents of their own state to pay the tax without some nationwide agreement.

So in order for every business in America to comply with every state’s sales tax laws, they would have to charge 50 or more different tax rates based on where the customer lives, and then file 50 different tax returns, on a monthly, quarterly or yearly basis depending on their revenues.

Europeans Want Their Share Too

What is worse is that the European Union is also trying to force U.S. businesses to collect VAT for European residents.  So U.S. businesses will wind up having to file a tax return for 50 U.S. States AND collect 28 different tax rates for each E.U. Member State as well. And if we set a precedent that every jurisdiction can collect taxes in any other jurisdiction, what is to stop Canada from requiring U.S. businesses to collect VAT for their 10 provinces and 3 territories?   What about other countries?

There actually is a simple solution to all this, that seems to elude almost everyone involved in creating the new laws.

Redefine What Sales Tax Is and Create a New Tax

Currently sales tax is defined as a tax on people’s consumption, that is collected by the seller.  Technically the seller does not owe the tax at all, the consumer does.  The seller is required to collect it, and is liable if they don’t transfer the funds collected to the state.

In most states, the tax is due even if the seller does not collect it.  For example, if you buy something from an online retailer in New York, and you reside in Texas, you technically owe Texas tax on that purchase, called a use tax, which is the same rate as the sales tax.

Thanks to court decisions and the U.S. Constitution, states can only tax people within their jurisdiction and cannot force sellers outside their state to collect use tax for its citizens.  New federal legislation is trying to change that.

It would be better to redefine sales & use tax into the following classes.

Traditional Sales & Use Tax

Traditional sales & use tax is a tax on the consumer, and would stay essentially the same as it is now, with the only change being that it will not apply to internet transactions.  This will allow states to continue collecting taxes under its current scheme at local businesses.

Internet Sales Excise Tax (ISET)

On internet transactions, the state would tax the seller instead of the consumer.

This would mean that a state can tax all transactions that occur within that state, as long as the seller is within that state.  So is someone in Texas purchased something in New York, the New York tax would apply since that is where the business is located.  Under this definition, it does not matter where the consumer is located.  Even international transactions could be taxes under this scheme, because it is a tax on the business, not the consumer.

The internet sales excise tax would be at the same rate as existing sales & use tax rates.

Sellers Located in Multiple States

Rules would be needed for cases where a seller is located in more than one state, to avoid double taxation, but those sellers could afford to file multiple tax returns and charge different tax rates based on where people live.

One way to solve this is to have a clearly defined location where the sales is said to take place, if that can be defined.  For example, if the sales office is in California, but the company happens to have a warehouse in Nevada, the internet sales excise tax would be applied where the sales office is only.  Since the warehouse does not take orders, it does not count.

Another way to solve this is to make it so that sellers that are located in only one state and make more than $1 million per year be subject traditional sales tax, and must collect a simplified sales tax for each state, whereas businesses located in one state and/or make less than $1 million per year would collect the Internet Sales Excise Tax instead.

Multiple scenarios would probably have to be worked out, to make the most sense.

Take Action

Regardless of whether you like internet sales tax, it is coming our way.  The time is now to act to ensure that a plan that makes sense is enacted.  Would you rather file 50 different tax returns, or would you rather file only one?  Better let your representatives know before its too late.

Image courtesy of Stuart Miles & FreeDigitalPhotos.net.


  1. I think this is a great concept. Too bad we can’t just get all the politicians to agree on a solution so simple.

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