Radical Simplification of State Sales and Use Taxes:



Radical Simplification of State Sales and Use Taxes:

the Prerequisite for an Expanded Duty to Collect Use Tax

A Proposal to the Advisory Commission on Electronic Commerce

by

Charles E. McLure, Jr.

Hoover Institution

Stanford University

There is no principled reason for a permanent exemption for electronic commerce.

1. At most a temporary exemption is justified.

2. Ronald Reagan: “The taxing power of government must be used to provide revenues for legitimate government purposes. It must not be used to regulate the economy or bring about social change.”

3. Statement by about 50 academic tax specialists.

4. Add: reduce rates to avoid a tax increase.

5. Implication: tax all commerce alike,

6. Main street.

7. Electronic commerce.

8. Other remote commerce.

9. Simplification is required for compromise:

to gain expanded duty to collect use tax.

10. The key problem: lack of uniformity of the tax base.

11. Different coverage of the tax base.

12. Different definitions.

13. Different exemptions for business purchases.

14. The key to simplicity: The same tax base in all states.

15. Unifying the tax base, I: Tax all sales to households,

16. Including services and intangibles.

17. Exemptions (e.g., food) should be uniform.

18. Uniform “menu” is not enough: uniform base.

19. Addresses many privacy concerns.

20. Bought something; no need to know what.

21. Need know only state and taxable purchases.

22. Uniformity alleviates compliance problem for firms in states with no sales tax.

23. Unifying the tax base, II: Exempt all sales to business.

24. Tied to federal income tax deduction.

25. Uniform exemption certificate.

26. Added advantages:

27. Avoids hidden taxes.

28. Economically neutral base.

29. More attractive to state economic development.

30. Avoids sales tax on exports.

31. Sourcing/Situsing of Sales and Local Tax Rates

32. Sales sourced to the local level.

33. States and local governments determine tax rates.

34. Use software to determine situs and tax rate.

35. Alternative: one rate per state

36. Unallocable sales (digital content and sales by firms with de minimis sales): “national” tax administered jointly by the states.

37. Not origin-based tax: race to bottom.

38. Sacrifice state sovereignty over base,

39. To retain state/local control of rates.

40. Other Administrative Simplifications

1. Options:

41. Base-state approach

42. Trusted third parties

43. Zero-cost compliance

44. State provision of software.

45. Realistic vendor discounts.

1. De minimis rule

2. Conclusion: Replace the Anachronistic System.

46. Designed for a world that no longer exists:

47. Local merchants.

48. Tangible products.

49. Local customers.

50. The world of the 21st century:

51. Services and intangible products.

52. Remote sellers.

53. Electronic commerce.

54. The proper policy response:

55. Avoid indistinct or inappropriate distinctions.

56. Between goods and services.

57. Between local and remote commerce.

58. Emphasize/clarify appropriate distinctions.

59. Between businesses and consumers.

How is it done?

60. Ideally done by joint state action.

61. Probably must be ratified by Congress.

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