Patrick Chen

INLS 187

Policy Analysis

Standardized Sales Tax Project (an effort by 38 state governors to draft legislation to standardize sales tax through out the country) for documentation see

http://www.nga.org/nga/lobbyIssues/1,1169,C_LOBBY_ISSUE^D_4907,00.html

Summary

In case you haven’t been paying attention or are living in an Iraqi bunker, the United States and much of the world is currently mired in a recession. While the American government gears for war, Americans are feeling the pinch in their local communities. During the rush of the internet bubble hey-days, states gloried in the suddenly ripe budgets that encouraged more spending and less taxes. So unfortunately when the bubble burst it didn’t make one but fifty loud, concurrent pops. In Washington State for instance, a local misanthrope had managed to put together enough clout to pass several tax initiatives that significantly eroded tax revenues and made public approval a requirement for all tax increases. Examples such as this one are by no means rare and the states are now paying for their largesse

Belts must be tightened and hard choices will be made. These are the times that state politicians dread. For states like North Carolina that are legally bound to balance their budgets it’s a nightmare. Funds will be raided, programs will be dropped and ultimately it’s the least fortunate who will be hurt the most. Yet a group of 38 governors with the National Governors Association having been working on legislation that may help buoy their sagging budgets. The Standardized Sales Tax Project’s main objective is to create national standards for sales tax for the entire country. This may not sound dramatic, but in a system with 7500 state and local tax jurisdictions it’s nothing short of revolutionary. Studies show that the increasing complexity of the sales tax system is rendering it less and less viable and the burden is being carried by an increasingly disproportionate segment of the population. Beyond the social and efficiency benefits, however, the real plum is revenue from online sales. Right now the majority of online sales avoid paying sales tax. As the national economy becomes increasingly borderless only 40% of current consumption is susceptible to taxation making ecommerce a revenue source that must finally be tapped. After all, nothing may be able to bring back the good ole days of the late nineties, but if the Internet bubble caused the recession then these governors reckon that the Internet should help pick up the tab.

The United States Supreme Court has ruled that only companies that have a physical presence or “nexus” in a state should be required to charge their customers sales tax. In other words if GunsandButter.com has a warehouse or a phone center in Nebraska then Nebraskans will be required to pony up sales tax whenever they make a purchase while Californians won’t. As a result action by the national Legislature will be necessary to legally compel online merchants to comply. Fiscally this could prove to be a godsend for the ailing state budgets. The NGA commissioned a study from the Center for Business and Economic Research at the University of Tennessee to research forgone sales tax revenues. The results are enough to make any governor giggle. They estimate that by 2006 the states will have collectively missed out on 45 billion dollars of revenue, just shy of a billion dollars that year for each state.

Of course online merchants on the whole aren’t wild about this idea. They argue that charging sales tax will deter potential consumers. While concerns such as these might have once been important to those hoping to encourage ecommerce, now that ecommerce revenues number in the tens of billions they are certainly outdated. Studies by Jupiter Research have shown that 82 percent of consumers said taxes didn’t affect their online purchasing which also goes far in assuaging company fears. In fact, some companies already charge sales tax. Companies such as Wal-Mart and Target have recently cut deals with the states to prevent any liability for uncollected taxes, and others have been collecting sales taxes for some time. The only really valid argument that online merchants have is that with so many jurisdictions figuring out how to tax a customer is too cumbersome to contemplate. With the advent of Standardized Sales Taxes, however, this last argument may soon be rendered irrelevant.

But wait, this fiscal utopia may have its dark underbelly. The reason this plan is so lucrative is that there is a lot of lucre involved. How wild are you about the idea that there will be a central record of all the items you’ve purchased online? How much data will be reported to the government? Will all our online purchases be logged and how secure can a system that would have to log millions of purchases a day be? Even if these problems are solved the temptation to sell this valuable data will surely be immense. In addition to privacy issues there are questions about the security of the whole system. The NGA is currently proposing that online merchants be provided with sales tax software that will help them calculate and report sales tax. That’s one government-built software package responsible for billions of dollars. Zealous governors promise that the Standardized Sales Tax Program is only two to three years away and obviously there are a lot of unanswered questions. Now that the world is on the brink of war in several arenas issues like this are flying under the radar. That’s worrying.

Criteria

StakeHolders So the question becomes how do we weigh the merits of this policy? First let’s define the stakeholders, the public and the ecommerce companies. By the public I refer to the state governments and the citizens they represent and by the ecommerce companies I am referring to all the vendors who would be induced to pay previously un-remitted taxes. As I explained above, this policy would greatly help the public by adding large amounts of monies to the state coffers and ecommerce would be relatively unaffected as has been illustrated in the deterrence study. Less measurable are the effects on the American society. In the last few decades the gap between the economic classes of the United States has increased steadily. This is seen as an alarming trend in a country that has traditionally considered itself an egalitarian society. Without exaggerating the effects of this tax, what’s being called the digital divide lies along economic lines between those who can afford a regular internet connection and those who cannot. As a result, levying taxes on online purchases will help shift a greater percentage of the tax burden to the more affluent sector of the population.

Clarity of Language What is also key is the fact that this legislation is still on the drawing boards. As alluded to previously, this is an especially worrying point about this legislation. As the point where this legislation becomes reality draws near, what some may fell are fine points may turn into major sources of abuse or risk. Billions of dollars rest on legislation passed by each participating state with their own idiosyncrasies thrown in.

Security Loopholes The next point of interest is the actual implementation of the law. While each state must pass its own individual version of the SST, the NGA plans to release a single software package that will handle the transactions for all of the states. This leaves an incredible amount of room for abuse and loopholes. The fact that government built software will have a hand in every online transaction in this country is enough to give anyone a moment of pause.

Coverage The interesting thing about the whole Standardized Sales Tax Project is that only 38 state governors are taking part. The last time I checked there were 50 states, so one has to wonder who is holding out and why. Of course some states or “tax havens” as their neighbors call them may not be interested in raising new taxes rather than just shoring up some existing tax loopholes.

Privacy This project also poses some serious potential privacy issues. Will this new online tax collection system turn into an internet commerce database? Will there be central records of every online transaction? Only time will tell.

Analysis

Looking at this list of criteria it seems that there are more cons than pros. Fortunately these cons are merely opportunities for abuse. What incarnation this legislation will finally take is something that will take some time to clarify. Until then we will have to closely watch the progress of this legislative push. The thing that is certain is that these added revenues will have a very real positive affect for state government. It will help buoy state programs that have a very real impact on the lives of ordinary citizens. As a student of a public university, I can certainly appreciate this fact. As the economy goes down the tube and the state budget is cut, my graduate program may face budget cuts or my tuition may increase.

While a new tax on say cigarettes or gas (a familiar fund raising vehicle) would hurt poorer segments of the population the most, these new taxes would mainly target the wealthy producing beneficial democratization effects which I feel would be advantageous for us all.

On the whole I think that despite the numerous opportunities for abuse that this legislation is inevitable and timely. The states are going to need these funds and I think that the benefits outweigh the disadvantages.

Recommendations

I would suggest that if this legislation becomes a reality that the Federal government step in and take charge of all software issues. The IRS has long experience with tax collection and I think it would benefit everyone involved if they were in charge of the mechanics of the process.

As a private individual I would urge that the bare minimum amount of information be gathered by the government for tax collection purposes. This kind of information could be abused if it was sold or stolen.