
Supreme Court Takes Up Internet Sales Tax Conundrum - _delirium
http://reason.com/volokh/2018/01/20/supreme-court-takes-up-internet-sales-ta
======
anonymous5133
I work as a sales tax auditor and I am always amused by these lawyers that
love to talk in the courts.

These guys aren't even aware of how badly the current nexus statues are being
abused. The current trend I've seen is companies move abroad (usually to south
america or the Caribbean) and then ship goods into the USA to all 50 states.
All sales are routed through this entity and thus since it is a foreign entity
they are not required to collect any sales tax at all. This actual entity is
most likely just a letter box company as well.

For the actual shipment of goods they have another company that acts as a drop
shipper. Most states have exemption rules that make drop shipment transactions
exempt from sales tax collection which gets abused since the duty to collect
falls to the foreign entity but the foreign entity has no duty to collect
either. Also due to these exemption rules, this structure is 100% defensible
in court as well!

If they need sales agents in the state then they use a network of "authorized
distributors" to do the soliciting. If you audit one of these authorized
distributors then all of them have the same defense: we do not own or ship the
goods being sold. We simply act as a sales agent (and only collect a
commission). If you want to do the audit you need to go to the company that
owns the products which of course is the foreign entity which does not have
nexus.

See how elaborate this stuff gets? To make matters worse, the use tax is
rarely paid by small consumers since it is way too complex to comply with and
to be frank the odds of you getting personally audited for sales tax are
pretty much 0% unless you are a high net worth person. It is no surprise that
the companies that setup these elaborate schemes often sell the majority of
their goods to small individual consumers rather than big companies. They know
that consumers will "shop the sales tax" and look for sellers who don't charge
it and thus the sales tax dodgers end up getting rewarded with more sales.

Also for everyone else, you might not see this as an issue but what often
happens is when revenue start to decline then the politicians either have to
cut services or more likely what they do is raise rates for other taxes. The
only people who benefit are those who buy from the companies and don't pay use
tax.

~~~
lotsofpulp
>the use tax is rarely paid by small consumers since it is way too complex to
comply with

How so? From my understanding, all you have to do is add up all your purchases
that did not have sales tax charged and multiply by the sales tax percentage.

If the government really wanted to fix it, all they have to do is slap a 50%
penalty on unpaid use tax, and audit the crap out of everyone. Since it's all
recorded on credit card statements, it's very easy to prove. At least it seems
like that to me on the surface, but I'd love to know why that solution isn't
possible.

~~~
_delirium
In most states you can't just add up everything you bought online all year and
multiply, because there are different sales taxes for different categories of
goods, and some items in an order might be exempt or taxed at special rates,
while others aren't. So you need to at least group the items into the
different categories.

For example, when I lived in Atlanta, there were four categories. Some items
were exempt from sales/use tax entirely. Others were exempt from the
_statewide_ component of sales/use tax, but still subject to local option tax
(groceries were in this category, so they were taxed at 2.2% or something like
that). Most of the remaining items were subject to the regular statewide and
local-option taxes. Finally, a handful of things (like cigarettes) had an
additional excise tax added on top. To make matters worse, you pretty much
need a database to determine which items go into which category; the rules
around what counts as "prepared food" (fully taxed) vs. "groceries" (partially
taxed) aren't entirely intuitive. Another example is that in many states (but
not GA), _textbooks_ are sales-tax-exempt, but other books aren't, so if you
order from an online bookstore, you need to treat those separately when
computing your use tax. The value of the individual items can also make a
difference: individual clothing items under $110 are tax-exempt in NY, while
those over $110 are taxable.

~~~
viggity
To further complicate matters, not only my city, but my zipcode too spans two
different counties.

------
jccooper
[http://www.streamlinedsalestax.org/](http://www.streamlinedsalestax.org/) is
an effort by (some) states to address the "burdensome" issue by simplification
of the tax code, maintaining a database of locations, and setting up a system
of "Certified Service Providers" (i.e. middlemen to handle all the absurd
requirements of calculation and reporting and insulate you from the flood of
audits that would stem from being subject to so many jurisdictions.) They are
even trying to convince residents of their member states to collect tax for
all the rest. (I wonder how many there are?) But they don't really have enough
states on board for their system to work, and haven't made much progress
recently. They've filed an amicus brief for South Dakota.

Their efforts are better than nothing, but in my opinion as an internet
retailer still fall well short of "not burdensome". Any system that requires a
whole new industry as a shim layer is pretty much broken.

Even though as an internet retailer I mostly benefit from the lack of
interstate sales tax I'm sympathetic to the "level playing field" argument.
Frankly, I think it's stupid that local customers are at a disadvantage when
buying from me. But a sane system would look like: (1) a single state-wide
rate for out-of-state filers, (2) a single national definition of what is
taxed, and (3) a single clearinghouse for filing and payment and auditing.
This will allow mom-and-pop to still exist, and the states will get their
money. It won't fill in all the special cases, and they'll have to figure out
some distribution for localities, but that's a small price to pay, isn't it?

~~~
gwenzek
I don't understand why the state isn't setting this up themselves. If they
want people to pay their tax they should make it easy by creating a Web API
that computes the tax rate for (zip code, product category, amount)

~~~
jccooper
I don't particularly want a new external service in my sales transaction, I
certainly don't want it run by a monopoly, and I really really don't want it
run by the government.

------
gist
Hard to say what they will do but one thing is for sure. If this goes in the
direction of states being allowed to tax without nexus then an entire level of
intermediaries will exist (and charge) to service smaller companies that are
subject to paying a sales tax. Not all goods are taxed the same way in all
states and there is no way that a company even with software can keep up with
remitting and rules that change for 50 states. There is also the issue of
integrating it in the current workflow which is non-trivial in many
situations.

My feeling is that (hopefully) the court will rule against this and require
the states to simply enforce use tax. The state has more resources (than any
small or medium company) and also the ability to fine and penalize. The law
says you have to pay use tax on out of state goods (in many cases) and simply
saying 'it's to hard for us to do this and we are losing revenue' isn't a
great argument.

~~~
ghaff
Yeah, computing the sales tax is easy. I assume there's already a lookup table
somewhere on the web where you enter a zip code and it will tell you the local
sales tax. The problem is remitting to tax to all the taxing authorities,
perhaps having to make other filings, being subject to audits and regulations,
etc.

Intermediaries can remove some of the burden but you can't really pass off
responsibility to a third party. It seems hard to avoid enormous overheads for
a small business outside of some uniform national system.

ADDED: I imagine Amazon and other big Internet commerce companies with
affiliate programs would love something like this. It would probably
effectively force any small seller to work under the umbrella of a company
with large scale.

~~~
MBCook
You can’t look up by zip code. Zip codes and tax boundaries aren’t linked so
it’s not specific enough.

Zip+4 isn’t specific enough either, you can still run into the same issue.

Then you get into the fun stuff like special tax districts, different taxes on
different kinds of goods, on the kind of person buying it (perhaps teachers
don’t have to pay taxes on office supplies), etc.

For a business it’d be a disaster if you had to tax based on the buyer’s
address instead of the business’s address.

For any business that isn’t huge enough to have lots of full time
accountants/compliance petiole I imagine you’d basically HAVE to subscribe to
some sort of tax service that would work it out for you.

~~~
DrScump

      Zip+4 isn’t specific enough either, you can still run into the same issue.
    

Depending on area, that can be very rare. My building has its own zip+4, and
even my P.O. Box has its own. In wrangling voter data, I didn't hit a single
case where a given zip+4 spanned multiple precints (but the 2000 census
gerrymander came close in a few cases).

------
Keverw
I was looking into FBA and also print on demand before. Kinda crazy the whole
Nexus thing. Plus with FBA, I don't believe they let you pick which warehouses
and some areas do it on the county level instead of state registration level.
I kinda wish the states would work together to make a one-stop shop for
businesses kinda similar to how it works in Europe. or if the states don't get
things together, even have the feds step in and create their own sales tax
that preempts the state's taxes. Then the feds pay the states a portion based
on population and take a cut for providing the service to the states.

I also think if you have a nexus, doesn't states then expect you to do foreign
business filings and income taxes - not just sales tax? Like in the printing
example, the company has centers in about 2 or 3 states + then also filings
for my state. So a single website that sells shirts and mugs on demand
dropshipping now has 4 states to deal with, with multiples of different
filings.

Then some states have a gross receipts tax that goes after out of state
businesses just for shipping an item even though they don't have a Nexus. They
call it a tax for the privileges of doing business with residents in those
states instead of a sales tax to get around the supreme court ruling.

Stuff like this discourages small business. I wish you were just allowed to
pick one single state to deal with and everything just magically happens. I
think if the states worked together and lowered the barriers they'd make so
much more money. Encourage more startups and less legal headaches for
bootstrapped businesses. Kinda like how vat works in Europe for online
businesses, you pay the taxes to your home corporation state and they figure
out what is owed to the other states and pay them for you.

~~~
gamblor956
All state-level taxes require nexus, even gross receipts taxes. I don't know
who told you otherwise but they were misinformed. Gross receipts nexus is
higher than sales taxes, because it claims know income.

Having a Nexus for one type of tax does not make you liable for other taxes,
i.e., sales tax Nexus doesn't necessarily subject you to income taxes in that
state.

~~~
ryanwaggoner
Yes but the definition of “nexus” is changing. Increasingly states are
switching to “economic nexus” based on where the “value” from the sale is
derived. Aka, customer address. And they’re levying sales AND income taxes
based on that.

I’m curious about interstate enforcement and whether this will even hold up in
court in the long run.

~~~
gamblor956
Levying a sales tax based on address may hold up in court. Levying income
taxes based on sales to customers in a state will not absent physical nexus or
sufficient in-state activity as to create a de facto nexus. This isn't just a
principle of federal tax law, it's a basic principle of tax law _everywhere_.

~~~
ryanwaggoner
Not for lack of trying: [http://www.bkd.com/articles/2014/new-york-enacts-
major-corpo...](http://www.bkd.com/articles/2014/new-york-enacts-major-
corporate-income-tax-changes-for-out-of-state-businesses.htm)

------
u801e
I've always wondered why a business isn't required to collect the sales tax of
the jurisdictions they're located in. For example, if I physically shop out of
state, I'll end up paying whatever sales tax that state /locality sets. The
only exceptions to that are high value items like cars which are subsequently
titled and registered in the state you reside in.

------
faster
My understanding is that a state sales tax can't be less than about 3.5%
because that is the cost of operating the sales tax collection bureaucracy.
The article's suggestion that the federal gov collect a uniform tax and
redistribute it makes me wonder what it would cost them to run the program.

And what about the 5 states that currently have no sales tax? A federal sales
tax would probably have to be close to 10% to be useful, and now everyone in
those 5 states has that much less buying power.

I don't think the solution proposed in the article is a good idea. It may be
the least bad idea though.

~~~
Bromskloss
> My understanding is that a state sales tax can't be less than about 3.5%
> because that is the cost of operating the sales tax collection bureaucracy.

That sounds staggeringly costly. Are there things within the administration
that has to be done and actually are difficult to do with less money, or is it
as record-breakingly inefficient as it sounds?

~~~
anonymous5133
I work as a sales tax auditor and the original comment is flat out wrong if
you think about it. I'm assuming he is talking about the department of revenue
or similar agency responsible for enforcement of sales tax. If you think about
a state that has a 7% sales tax rate, do you think that state is spending HALF
of the sales tax revenue on the operating budget for the department of
revenue?

~~~
faster
I'd love to have some support for a real number. I found a source [1] for the
cost to retailers to collect a tax (about 4.23% of tax collected in WA) but
while most states make it pretty easy to see how much sales tax was collected
they don't make it easy to see what it cost to collect that tax, separate from
the other taxes they collect (income tax, corporate tax).

If you have any insight into this, or suggestions that are less painful than
"read the state budget detail", I'd love to have a cost number that is based
on facts.

[1] [https://dor.wa.gov/content/retailers-cost-collecting-and-
rem...](https://dor.wa.gov/content/retailers-cost-collecting-and-remitting-
sales-tax-study)

------
tzs
To illustrate how annoying it could be to have to collect out of state tax if
you are fully exposed to that state's sales tax structure, here is an example
of what you are supposed to do in Washington when charging Washington sales
tax for an online purchase by a Washington customer.

Imagine this x50, with possibly each of the 50 having their data formatted
differently and distributed differently.

The tax rate is the tax rate at the buyer's address.

You can get a CSV file from the state for each Washington county that gives
address information. Here are the first few lines of the file for King County
(the county that contains Seattle):

    
    
      ADDR_LOW,ADDR_HIGH,ODD_EVEN,STREET,STATE,ZIP,PLUS4,PERIOD,CODE,RTA,PTBA_NAME,CEZ_NAME
      301,399,O,10TH AVE N,WA,98001,6519,Q12018,1701,Y,King PTBA,
      1500,1598,E,10TH CT NW,WA,98001,3868,Q12018,1702,Y,King PTBA,
      1501,1599,O,10TH CT NW,WA,98001,3868,Q12018,1702,Y,King PTBA,
      1,99,O,11TH AVE N,WA,98001,6518,Q12018,1701,Y,King PTBA,
      200,298,E,11TH AVE N,WA,98001,6516,Q12018,1701,Y,King PTBA,
      300,398,E,11TH AVE N,WA,98001,6514,Q12018,1701,Y,King PTBA,
      301,399,O,11TH AVE N,WA,98001,6556,Q12018,1701,Y,King PTBA,
    
    

The first entry,

    
    
      301,399,O,10TH AVE N,WA,98001,6519,Q12018,1701,Y,King PTBA,
    

tells you that it covers addresses from 301-399 on the odd side of 10th Ave N,
in WA. These addresses all have zip code 98001-6519. The data is for Q1 2018.
The location code for these addresses is 1701. The "Regional Sound Transit"
indicator is 'Y' (this is a boolean). The "Public Transportation Benefit Area"
is named "King PTBA". The name of the "Community Empowerment Zone" is blank.

The location code is the most important part as far as sales tax goes, because
it is the location code that you use to look up the tax.

The most correct way, therefore, to figure out the tax is to get the customer
street address, look it up in the address CSV for their county to get the
location code and then look up the tax.

That is very annoying. People often spell their streets in ways that will not
match the database. Consider:

    
    
      10000,10098,E,MARTIN LUTHER KING JR WAY S,WA,98178,2045,Q12018,1726,Y,King PTBA,Duwamish
      10462,10498,E,MARTIN LUTHER KING JR WAY S,WA,98178,2046,Q12018,1726,Y,King PTBA,Duwamish
      12801,12899,O,MARTIN LUTHER KING JR WAY S,WA,98178,3513,Q12018,1700,Y,King PTBA,
      12901,12999,O,MARTIN LUTHER KING JR WAY S,WA,98178,4611,Q12018,1700,Y,King PTBA,
    

Plenty of people are going to write that street as "MLK Way" instead of
spelling it out. You need to deal with that.

You could go through all the address files, and make a mapping of zip+4 to
location codes. For the vast majority of zip+4 codes, I believe that all
covered addresses would map to the same location code.

The tax for each location code is in a CSV file from the state. Here is a
sample:

    
    
      Name,Code,State,Local,RTA,Rate,Effective Date,Expiration Date
      KING COUNTY RTA,1700,0.065,0.035,0,0.1,20180101,20180331
      ALGONA,1701,0.065,0.035,0,0.1,20180101,20180331
      AUBURN/KING RTA,1702,0.065,0.035,0,0.1,20180101,20180331
    

The entry

    
    
      KING COUNTY RTA,1700,0.065,0.035,0,0.1,20180101,20180331
    

says that location 1701, named "KING COUNTY RTA", has a state sales tax rate
of 0.065, a local sales tax rate of 0.035, an RTA rate of 0, and an overall
effective rate if 0.1. This entry is valid starting on 2018-01-01 and is value
through 2018-03-31.

You can also get the rate data organized by zip. Here's a sample of that file:

    
    
      98001,0000,1732,0.06500,0.03500,0.10000,20180101,20180331
      98001,0001,1702,0.06500,0.03500,0.10000,20180101,20180331
      98001,0006,1701,0.06500,0.03500,0.10000,20180101,20180331
    

The columns for that are 5 digit zip, 4 digit zip extension, location code,
state tax rate, local tax rate, effective tax rate, and valid dates.

There's also a short form version of that CSV available:

    
    
      98001,0000,0000,1732,0.06500,0.03500,0.10000,20180101,20180331
      98001,0001,0001,1702,0.06500,0.03500,0.10000,20180101,20180331
      98001,0002,0005,2720,0.06500,0.03400,0.09900,20180101,20180331
    

It's essentially the same, except that instead of each line covering exactly
one zip+4, each line covers a range, so the first 3 columns are 5 digit zip,
low 4 digit zip extension, high 4 digit zip extension.

It's important to note that locations have no inherent relationship with zip
codes. There is no reason that a location could not include addresses in
different zip codes, or that a given zip+4 could not include more than one
location.

Fortunately, it turns out that no zip+4 crosses a location boundary, so in
practice you can forget all that address file crap and just work from the zip
files. BUT THERE IS NO GUARANTEE THAT THIS WILL ALWAYS APPLY, as far as I can
tell.

Going with zip you still have the issue that many people don't know their full
zip+4 offhand. If you require it you will induce some people to abandon the
purchase.

What we did is use the long form zip to location data, and we take as the tax
the maximum tax from all rows that match the zip the customer provides. If
they just provide a 5 digit zip, they get the max rate for that 5 digit zip.
If they specify zip+4, they get the correct rate for their location.

With the simplification of just going by zip this is not actually much of a
pain to deal with. It does mean that every quarter I have to grab the updated
rates for the next quarter and merge them into our tax rate database.

But that's because it is only one state. If I had to do it for 50 states, that
would be a problem.

EDIT: Actually, there are zip+4's that cross location boundaries. Here is an
example from the address file:

    
    
      9100,9198,E,RENTON ISSAQUAH RD SE,WA,98027,5444,Q12018,4000,N,King PTBA,
      9101,9199,O,RENTON ISSAQUAH RD SE,WA,98027,5444,Q12018,1700,Y,King PTBA,
    

The odd site of the street is in 1700, and the even side is in 4000. These two
locs have different tax rates. From the rate CSV:

    
    
      KING COUNTY RTA,1700,0.065,0.035,0,0.1,20180101,20180331
      KING COUNTY NON-RTA,4000,0.065,0.021,0,0.086,20180101,20180331
    

So, if you just go by zip+4, you won't handle those people right.

~~~
fjsolwmv
Sales tax is and absurdity and needs to be replaced by property tax and income
tax

~~~
spoonie
Land Value Tax instead of property tax. Prop Tax discourages owners from
improving their properties because then they’d owe more tax. Land value
usually isn’t created nor destroyed by the owner, so it makes more sense to
tax it.

------
smnrchrds
How come there are 6000 sales tax jurisdictions? In Canada, there are 10. I
know US bigger than Canada and everything is more complicated, but it's not
600 times bigger.

~~~
pkaye
In California for example, there is a state base tax rate to which the county
adds an additional amount along with the city you reside in. So there are
hundred of sales tax rates depending of which city you live in.

~~~
DrScump
Drilling down below state level is complicated by the fact that mailing
address does _not_ map directly to the proper taxation entity. _Usually_ ,
yes, but the actual atomic entity is lot/parcel. I had to deal with this when
cooking voter data; political districts likewise drill down to lot/parcel. I
had hundreds of cases where Los Gatos and Saratoga addresses get crossed, and
even the Santa Clara / Santa Cruz county border region he had mailing address
mismatches with actual county of residence.

------
hartator
Reason is an awesome publication, I wish we can see more articles of them
here.

~~~
_delirium
This isn't really from _Reason_ proper fwiw. The Volokh Conspiracy is a long-
running law blog that's been hosted at various places, including independently
(2002-2014), at the Washington Post (2014-2017), and at Reason (post-2017).
Afaict they don't follow the Reason editorial line now, any more than they
followed the WaPo editorial line previously, though they have always had a
somewhat libertarian bent.

