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tl;dr> When a transaction occurs over the internet, why do you collect sales tax in the purchaser's home state, and not the producers?

This article in The Economist: "Click and Pay" discusses how sales taxes are levied in the United States. In the US, sales taxes (unlike VATs) are a gross percentage on a price, typically remitted by the business selling the good or service, to the government in question. That this is complicated by the Internet (and mail order in general) is explained by the article:

It makes no economic sense to tax sales in shops and over the internet differently. The prohibition is constitutional. In 1992 the Supreme Court ruled that states could not force out-of-state retailers to collect tax on sales to residents unless Congress, which oversees interstate commerce, said so. Only retailers with a physical presence—a “nexus”, in the legal jargon—in the state could be taxed.

The economic consequences were relatively minor before Amazon and eBay appeared. Not any more. Since 1994, mail-order and internet sellers have grown from 2% of total retail sales to 7%. In the past five years, while retail sales have risen by 10% and total state and local taxes by 9%, sales-tax revenue is up just 2%. The National Conference of State Legislatures reckons that the court’s prohibition cost states $23 billion in lost taxes last year.

What is interesting to me is that in a mail-order situation, there seems to be a presumption in distant sales that the transaction occurs where the customer is, and not the provider of goods or services (hereafter "the business"). As the article continues:

In theory, online customers are required to pay sales tax themselves. Unsurprisingly—since there are no means of enforcement, and no customs stations on state lines—few do. This galls traditional retailers like Best Buy and Target, who must charge tax not only in shops but also online in states where they have stores.

Retailers and state and local governments have long recognised that the ideal solution would be for Congress to allow states to tax the internet. But previous legislative efforts have stirred furious opposition from anti-tax activists and discomfort among many Republicans, who think this sounds like a new tax. Although the activists remain opposed, Republicans are increasingly sympathising with retailers and with local governments that are trying to build public works, such as sewers, while their tax base migrates into cyberspace. “You can’t flush your toilet over the internet,” says Mike Enzi, a Republican senator from Wyoming who spearheaded the amendment with Dick Durbin, a Democrat from Illinois.

The Marketplace Fairness Act, as the proposal is called, allows states that simplify their sales-tax laws to compel online retailers to collect taxes. In preparation for passage, 24 states have joined a coalition that harmonises and simplifies sales-tax collection, for example by using common definitions of goods that are subject to tax. That would soothe e-tailers’ worries about collecting different taxes in thousands of state and local jurisdictions. Amazon, one of the fiercest opponents of state-level efforts to collect internet taxes, backs the federal law, while warning against too high a threshold for exempting small sellers, now set at $1m. EBay, on the other hand, opposes any bill without a “robust” exemption. The law would not overturn the federal prohibition on taxing purely digital goods, such as internet access and e-mail.

Why is this, then, the case - that the transaction is "supposed" to be at the place of the customer? The business, it seems to me, is better placed to both collect and profit from the use of taxes, moreso than the purchaser - but that is just speculation. What is the economic argument.

For sake of any answers, it might be useful to imagine, for example, a Maple Syrup provider (who of course must hail from Vermont) sells her syrup over the internet to a guy in New York. To tax in both New York and Vermont would be double taxation - but why is the presumption that New York should benefit from a transaction that took resources from Vermont? What is the argument against saying that the transaction simply occurred in Vermont - where the Maple Syrup producer's business is located?

  • why not collect any way possible or not at all? money. never seems to be a surplus – user1726 May 6 '13 at 2:55
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Based on the outline for the proposed law in the wikipedia page for it, this affects both internet and in-person sales.

It sounds like this is partly to give states with a sales tax less of a disadvantage for retailers as well. The article cites the example of states with a lot of cross-border commerce because of sales tax disparities - basically people driving from a sales tax state to a non-sales-tax state to make purchases.

The proposed law would seemingly require those retailers to collect and pay sales tax for anything sold to residents of the other state.

I have no idea how they could possibly enforce this, or how the retailers could check (require a zip code for all purchases?). However, to answer your question, the rationale is that the home state of the consumer should benefit from the purchase regardless of where the sale is transacted since it's interstate commerce.

It also sounds like this would be ON TOP OF any existing in-state sales tax that the retailer is required to pay, but none of the info I can find makes it very clear.

  • This sounds quite plausible. For instance, if I live in a state with 6% sales tax, I'm going to have a tougher time selling my stuff to a state with zero sales tax if I have competition in that state. – user1530 Apr 11 '13 at 20:48
  • @DA. true, and I think the law is targeting the obverse - people in your 6% state driving cross-border to buy from stores in the 0% state. That smallish tax adds up for things like back-to-school shopping (a lot of states do tax holidays for that) or cars, or any other large purchase. – JNK Apr 11 '13 at 20:51
  • This is also in line with international VAT rules: if a tourist buys some item in country C, and takes it home with them to country H, then they can ask a VAT refund from C and have to pay importation VAT when entering H. – cbeleites Jun 8 at 17:31

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