Wednesday, May 22, 2013

Online Sales Tax Not So Simple or Wonderful

In the New Jersey Star Ledgers editorial, "A Level Field," it is argued that it is time for online sellers to collect state sales tax.  The principle concern is that New Jersey is losing out on tax revenue.  But the issue is not that simple. There is the little matter of the interstate commerce clause in the US Constitution. In the case of Complete Auto Transit vs. Brady, U.S. Supreme Court said that collecting taxes on out-of-state sales is constitutional when:

1.  The activity taxed has a substantial nexus with the taxing state
2.  The tax is fairly apportioned
3.  The tax does not discriminate against interstate commerce, and
4.  The tax is fairly related to services the state provides the taxpayer

With this in mind, consider the example of a couple in New Jersey who goes online to the website of a California firm to buy a product made and shipped from New York State. Where is the point of sale? Which state can claim to have the most substantial nexus?  In which state are the most taxpayer supported services provided as related to this sales ransaction?

These are questions for those drafting the Market Place Fairness Act to consider.  If raising state revenue was the primary consideration, each state might decide to impose their own sales tax in the above example.  This situation would discriminate against interstate commerce.  More importantly, if raising state revenues is the issue then the obvious places to start would be the elimination of tax loop holes and sweetheart deals for businesses, elimination of the ridiculous tax loopholes for wealthy individuals, and maybe raising taxes on those who  financially benefit the most in New Jersey.  Sales taxes are already far too regressive and burdensome to the poor.

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