No More Voluntary Taxes!
April 28th, 2011
I live in Oregon where there is no sales tax. Before I moved here, I took the sales tax for granted. If a bottle of coke costs $1.00 then you can expect to dole out a dollar bill and some change. Now, I go to a restaurant and my bill always comes in a rounded figure. Imagine that!
But I digress. The lack of a sales tax gives Oregon something of an advantage of its neighbors to the North and South. Many who live in Vancouver, Washington, for example, will venture across the border to buy expensive items in Portland—creating jobs and incomes in Oregon. Those who live in Seattle, however, are less likely to make the long trip. So until recently most states—particularly those in the West where borders are few and far between—didn’t have much of a problem.
That has changed with the rapid rise of e-commerce. According to a study at the University of Tennessee, yearly e-commerce sales rocketed from $995 billion in 1999 to an estimated $4 trillion in 2011. State tax codes were not written to deal with this magnitude of inter-state transactions, so needless to say there’s been some friction in the last decade. I won’t bore you with the entire history. Here’s the short version. By law, most websites are not required to collect sales tax on purchases by out-of-state customers. This gives retailers like Amazon and Overstock a pretty nice advantage over the general store down the street.
However, here’s something you may not know. Customers who live in a state that collects sales tax are by law required to pay a tax on goods purchased online to their home state even if the website doesn’t collect it. This is called a use tax—it’s generally equal to each state’s sales tax—and all taxable goods are subject to one or the other. Different states collect these taxes in different ways. If I lived in Washington, for example, I would have to fill out an application online or by paper to pay a use tax levied at 6.5% of my goods purchased in Oregon or elsewhere. This would apply regardless of whether I drove to Portland to buy a computer or I bought a new book on BarnesandNoble.com.
Fortunately I don’t face a dilemma because I live in blessed Oregon, where my fellow voters have rejected a state sales tax (count them) nine times. But I must ask myself, what if I lived just across the border in California—the state with the highest sales tax in the nation? In a debate which has become nationally symbolic, California has a projected $25.4 billion budget shortfall this year, which is nearly the size of the total general fund budget of Delaware, Idaho, Maine, Montana, Nebraska, Nevada, New Hampshire, North Dakota, Rhode Island, South Dakota, Vermont and West Virginia combined. According to the University of Tennessee study I cited earlier, California will also lose an estimated $1.7 billion in sales tax revenue to e-commerce in 2011 alone. Yet even I, who believe strongly in the anti-tax evasion message, would find it difficult to voluntarily send a check to California every time I bought something online.
So you see the dilemma. Voluntary reporting doesn’t work. Solutions have been put forward. Hawaii, for example, is looking to require internet sellers to hand over information about their customers to the government so that the revenue agency can collect what it’s due. As Rep. Isaac Choy, D-Manoa put it, “All we’re saying is, ‘Hey, we can’t force you to collect our taxes, but we can request information from you. If you’re not going to collect our taxes, give us information and we’ll collect our own taxes.’”
Sound familiar? It’s almost identical to the philosophy embodied by those of us who support county-by-country reporting. In this proposed policy all multi-national corporations would “report sales, profits, and taxes paid in all jurisdictions in their audited annual reports and tax returns.” As a result of loopholes in the world’s tax system, MNCs essentially face “voluntary” taxation because they can choose to publish segmented information on a non-geographic basis. MNCs present their accounts as a unified whole, but they are not taxed that way.
Information is the key here, whether it is a requirement that a company reports on itself in a way that truly represents their tax liability or whether a retailer reports on its customers, who have no incentive to self-report. While I believe it would be difficult to voluntarily self-report my owed sales tax if I lived in Washington, I would have no problem paying a bill to the state I lived in as a result of my tax obligations. In the words of Senator Carl Levin this is a “painful, but patriotic duty to a country we love.” Self-enforcement doesn’t work—not for revenue agencies in Washington State nor those in Washington, DC. Let’s not keep pretending there’s any solution other than mandatory reporting.
One final note: the U.S. government does accept donations to the Treasury’s Bureau of Public Debt, where your money would go to help paying down the deficit. A truly voluntary tax. And despite all our hollering about the deficit, the Bureau has collected about $26 million in the last fifteen years. That’s 0.00018% of the current national debt.