Taxing Internet Sales

Gary Sisco · September-29th-2003, 08:23 AM

I saw an article the other day in the local paper that there's a move afoot in Congress to make internet sales sales-taxable by the states. In it, it declared how much money in state sales taxes have been "lost" to the internet, but this reasoning only holds up until one begins following the logic out for a while.

For example, what did VT "lose" in sales taxes by my buying music via the web? I'd say it's just about close to zero, because, since the independent record store is extinct where I live, there wouldn't have been a VT source anywhere, where I might have made 99% of my CD purchases in the past year. Looked at that way, VT may have lost, at most, 18 cents in sales taxes, from me, this past year, being six cents on each record I bought that would have been available *if* I'd driven an hour into Burlington to buy them. By my calculation, all but three of my purchases over the past year would not have happened if my buying had occurred in VT stores.

The logic the gov't is working on assumes I'd have made all of those other purchases as well, in Vermont, if it hadn't been for the "loophole" in the sales tax laws. Wrong. There isn't even a chain store here that would have most of the labels I deal with available to them from their distributor or two. In fact, even when there was an independent store here, where I worked, I was having an increasingly difficult time buying titles even as special orders, for that reason. And that was with me doing the special ordering, personally. So, in fact, if it were not for the web, almost all of my CD buying over the past year would have taken place in NYC while I was there, not in VT, where I live. So what has VT lost? Nothing.

The other, more problematical, question is: Where does an e-purchase take place? If I order from DMG in NYC, via my computer in VT, where did the sale take place? VT or NY? Both? Nowhere? Where? If it's both, do I have to pay sales tax to NY and VT? Where is the point of sale?

To make the point further: Drimala sold its website to some people who live in France. Where does that website exist?

Tom Storer · September-29th-2003, 11:39 AM

It is indeed hard to figure out where the sale takes place, but since governments on all levels are used to taxing the sale of goods, it stands to reason they would eventually act to be able to tax Internet sales. There's money to be made!

How does it work for traditional mail-order sales? If company X has its headquarters in Kansas, its manufacturing plant in Peru, and distribution centers in fourteen states, and you, in Vermont, order from their mail-order catalogue, where does the sale take place? Who collects the sales tax - Kansas, Vermont... ?

Uli · September-29th-2003, 11:47 AM

I don't hink that's an internet issue. It's an accross borders issue. I think in Chicagoland i've seen car dealer adds that sey they gonna use the sales tax whatever is cheapest, town, county either which way.

Jimmy Cantiello · September-29th-2003, 12:07 PM

I always get a laugh at the Connecticut state tax forms. They actually want you to rat yourself out. There's a section where you're supposed to tell them what you bought online or by mail order from other states and submit the appropriate amount with your tax return......................

Gary Sisco · September-30th-2003, 08:02 AM

Jimmy -- Vermont has the same thing. I'm sure lots of people fill it in. Right.

I'm still curious about the virtual tax. Okay, now. So when the Drimala site comes back up, this time owned by someone in France, will French people now be required to collect US state sales taxes? I'm sure that'll happen... Where will the Drimala site "be"?

I'm sure they'll find someone to tax it, as they have everything else. Still seems like bogus logic to me. As I said above, because I buy something online doesn't mean I would have bought it offline. Most of the music I buy online wouldn't be available, even, offline, for me, in the US, closer than Boston. I can't see where VT has "lost" any sales taxes out of it, if the merchandise isn't even available here. And it's not like I'd have gone out and bought anywhere near the number of CDs, if I were to choose from what is available. Chances are, like I said, I'd just wait until I could hit a real record store in NYC or Boston.

Another practical matter: Internet sales is one of the few growing places in the economy. Hey, I know, let's put a brake on it by taxing it! Yeah, that'll be good!

Dan G · September-30th-2003, 10:34 AM

Quote:

Originally posted by Gary Sisco
I'm still curious about the virtual tax. Okay, now. So when the Drimala site comes back up, this time owned by someone in France, will French people now be required to collect US state sales taxes? I'm sure that'll happen... Where will the Drimala site "be"?

Cross-border shopping is easy to tax - you don't get it until you pay at the post office. So international seller just charge their normal price, fill out a customs declaration for the value, and you pay before you get it. Living in Canada and buyuing lots of music from US dealers, i do this all the time.

Internal to the country, it is probably harder expecting someone in one state to collect for other states and would be an accounting nightmare to keep track of out of state sales and submit taxes, especially when the tax rates vary from state to state. We don't evenhave to do that here, and we're taxed on everything. Of course, the US, like many other countries, could impose a federal sales tax that everyone has to pay.

Tom Storer · September-30th-2003, 11:39 AM

It seems to me that online sales are no different from mail order sales. In both cases, there is a physical seller based somewhere and a physical buyer based somewhere. The web site replaces the printed catalog, that's the only difference. Worrying about where the web site's server is would be like worrying about where the catalog's printing press is. No?

claude · September-30th-2003, 12:30 PM

Quote:

Originally posted by Tom Storer
It seems to me that online sales are no different from mail order sales. In both cases, there is a physical seller based somewhere and a physical buyer based somewhere. The web site replaces the printed catalog, that's the only difference. Worrying about where the web site's server is would be like worrying about where the catalog's printing press is. No?

I assume that their main concern is products such as E-Music or software downloads where there is no physical delivery. I can't imagine that the dollars are huge yet, but the potential is there, particularly as download times go down. The place of supply rules that we use in Canada get pretty fuzzy when you are downloading the product as opposed to getting the product mailed.

Chris D · September-30th-2003, 12:45 PM

The sales are considered to have occurred in the buyer's location. That's why you see things like "Illinois residents add ?% tax" on certain mail orders.
This is established legal precedent.

Gary Sisco · September-30th-2003, 01:45 PM

I dig all that but the fact is they're offering as a rationale that the states are "losing" sales taxes. But they can't "lose" anything that wouldn't have been sold to me, in the state. Almost nothing that I buy online is available in any store in Vermont. I've never paid or been required to pay sales tax on a snail-mail order of anything at all, CDs included, when I used to buy them that way, like with record clubs, for instance, or direct from labels.

If the point of sale is at the seller's end, then, say, Erstwhile in NJ is supposed to collect VT's 6% when the sale occurs? Then what? Jon's supposed to send it to VT? This all seems like madness, to me.

But, whatever. Everything involved with the state is madness to me. If there's a way to make something as illogical, complicated and expensive as possible, that's the way they'll go, every time.

In any case, if I am forced to start adding six percent for the Man to every CD I buy, plus shipping and all that, my internet buys at least will certainly decline, and significantly. I can't imagine I'll be alone.

Jimmy Cantiello · September-30th-2003, 01:59 PM

Quote:

Originally posted by Gary Sisco

If the point of sale is at the seller's end, then, say, Erstwhile in NJ is supposed to collect VT's 6% when the sale occurs? Then what? Jon's supposed to send it to VT? This all seems like madness, to me.

I know it sounds ridiculous, Gary, but that's exactly what the states expect...................

Jon Abbey · September-30th-2003, 01:59 PM

Quote:

Originally posted by Gary Sisco
If the point of sale is at the seller's end, then, say, Erstwhile in NJ is supposed to collect VT's 6% when the sale occurs? Then what? Jon's supposed to send it to VT? This all seems like madness, to me.

yeah, god only knows how I would go about doing that, as if I don't have enough to keep track of now...

jesus marion joseph · September-30th-2003, 08:29 PM

Quote:

Originally posted by Gary Sisco
I can't see where VT has "lost" any sales taxes out of it, if the merchandise isn't even available here. And it's not like I'd have gone out and bought anywhere near the number of CDs, if I were to choose from what is available. Chances are, like I said, I'd just wait until I could hit a real record store in NYC or Boston.

Gary, you need to embrace the concept of "legal fictions". Only then can you experience true enlightenment.

Gary Sisco · October-1st-2003, 08:03 AM

I forgot.

Gary Sisco · October-1st-2003, 08:05 AM

Couldn't they make it a virtual tax that we can virtually pay?

Seems only fair...

jesus marion joseph · October-1st-2003, 08:22 AM

Since when does "fair" have anything to do with it?

Tom Storer · October-1st-2003, 09:25 AM

Quote:

Originally posted by Chris D
The sales are considered to have occurred in the buyer's location. That's why you see things like "Illinois residents add ?% tax" on certain mail orders.
This is established legal precedent.

There you have it, Gary. Vermont considers that it is losing sales tax because when you order over the web, that sale is considered to have taken place where you live, i.e. Vermont, and you haven't been taxed for it. No different from a mail order catalog. If you have to pay your local sales tax when you order from a mail order catalog from a company based in another state, what's different about online sales?

Claude, you said: I assume that their main concern is products such as E-Music or software downloads where there is no physical delivery.

I disagree that there's no physical delivery. A file is a physical thing, even if that "thing" consists of a certain pattern of electrical charges in a recording medium. Download enough files and your hard disk fills up! Delete the files physically - by changing those bits and bytes - and you have no files left. Their existence is physical.

It's true the files are copied rather than transferred. Maybe they should consider the file copy a service rather than a product.

Gary Sisco · October-1st-2003, 09:36 AM

Well, one of the obvious differences would be that it's not VT that's trying to establish the tax law. It's the feds. Sales taxes, while used in VT for obvious reasons, are political hot buttons, a hugely unpopular idea to propose -- one of the reasons being that NH, with which VT shares a border, has none. So all the business types -- along with class-conscious others who understand what a regressive tax is -- up and down the eastern half of VT go berserk whenever the idea is raised.

In VT, like Jimmie says for CT, we are expected (I'm sure, hilariously, at the appropriate offices) to fill in our own blank on the tax return and pay up voluntarily. Right. I'd bet it would be funny as all hell to see what tiny percentage of a percentage of guys actually do that -- none of them being the ones who made the law, of course. Looks good on paper, though, and I think it should be left that way. Looking good on paper.

By the way, I do understand the repeated point about "Illinois residents add ..." but I've also noticed the paucity of states requiring such declarations. Many more have sales taxes than those.

It also seems to me only logical that the point of sale is on the seller's end, no matter how payment is made. Where's the cash register?

SinginSumo · October-1st-2003, 11:55 AM

Let me guess that such a proposed tax might turn out to be a FEDERAL TAX, circumventing all issues regarding where a transaction is made OR where the product or service is being shipped from OR where the product or service is being shipped to.

So much for those CD price cuts at Universal...

Tom Storer · October-1st-2003, 03:58 PM

As I understood it, and according to the first post in the thread, the federal law will make it possible for states to sales-tax online sales. It'll still be a state sales tax, and it will logically follow the model of mail-order sales, since that's all online sales are.

But to make it possible, they have to make it possible for all states. That doesn't mean states that have no sales tax will necessarily risk voter ire by suddenly starting with the internet.

On the other hand, maybe they will.

Why is it necessary for the feds to enact a law to enable states to do this? Why can't states just do it if they want to?

Al in NYC · October-2nd-2003, 01:26 AM

Quote:

Why is it necessary for the feds to enact a law to enable states to do this? Why can't states just do it if they want to?

Because states other than a business' home state would basically have no authority to compel out-of-state vendors to pay their sales taxes, since the states have no constitutional authority to get involved in the regulation of interstate commerce. This is why states can only ask taxpayers themselves to volunteer to pay sales taxes on items purchased from out-of-state vendors, because they have no legal authority to collect from the vendors themselves (which is, after all, how they collect sales tax from regular purchases in state).

In fact, even for mail order transactions, the states can only really collect tax on sales made within the state. So, if you look at most of those "Illinois residents must add x%" messages, the company sending out the products will be in Chicago or its suburbs. Some states, like New York, have tried to collect on out of state mail order sales, but this has been generally unsuccessful, in large measure because the mail order (and now internet order) industry has vigorously opposed it for obvious reasons. Most companies have simply refused to put the sales tax messages of N.Y. and states other than their home states on their forms.

So the cry from the states is for the feds to step in and make laws so they can collect their taxes, presumably under cover of the federal authority to regulate commerce. Of course, the obvious way to tax these sales, if that is really felt to be necessary for some reason, would be through a federal sales tax like the VATs charged in other countries, but this would be tremendously politically unpopular (for damn good reason) with both consumers and companies, and would also be opposed by the states as they would see it as the feds intruding on one of their major sources of revenue.

Gary Sisco · October-2nd-2003, 08:06 AM

Okay, now there's an answer that makes sense to me, even though I don't support the idea, either for the states or the feds.

I was wondering what other people were taking so much for granted because I'd never paid a VT sales tax (or any I can remember) on a mail order.

I'm still wondering about the point of sale, though, as I know in VT the 6% is added on to the retail charge (on all but unprepared food and clothes) and the customer pays it. Seems to me that if the point of sale is wherever the buyer exists, then, say, an Aubuchon Hardware franchisee on the local level, when ordering his stock from, say, California, ought to be charged the 6%. He or she's doing the buying, right? He or she is physically located in VT, right? Yet, I know that they are not charged the tax; only the retail customer is, at the cash register. That's in fact one of the reasons they are able to have one at all, here, as part of the rationale to get political support for a sales tax at all is VT's tourist economy, so the pols always point out that a large portion of the tax will be paid by tourists, not residents. Well, I'm sure they'll come up with some twisted logic about why the location of the cash register is different online than it is in a local store, so that now DMG's register and everyone else's in the world exists in VT, not NYC. The whacky world of the state.

Sumo -- See the thread on the alleged decrease in price of Universal CDs. As always, things are not what they appear.

Monte Smith · October-2nd-2003, 12:07 PM

I have to pay tax on anything I order from Amazon because they are located just up the street from me. That's why I do most of my ordering on BN.com, who move stuff out of their New Jersey warehouse. So how much does Washington State lose by taxing me? Washington's loss is New Jersey's gain.

claude · October-2nd-2003, 05:00 PM

Quote:

Originally posted by Tom Storer

Claude, you said: I assume that their main concern is products such as E-Music or software downloads where there is no physical delivery.

I disagree that there's no physical delivery. A file is a physical thing, even if that "thing" consists of a certain pattern of electrical charges in a recording medium. Download enough files and your hard disk fills up! Delete the files physically - by changing those bits and bytes - and you have no files left. Their existence is physical.

It's true the files are copied rather than transferred. Maybe they should consider the file copy a service rather than a product.

I agree that a physical delivery occurs, what the tax authorities don't like about it is that there isn't anything that physically goes through customs so they can tack on their charges. From the Canadian tax authorities' perspective that is the concern that I know of. The issues of state (or provincial) taxes are another thing altogether since there is no customs mechanism to catch the deliveries of course. In the province that I live in we only pay a federal sales tax so those issues don't come into play.