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James P. de Bree Jr.: Use tax is hard to enforce

Posted: August 21, 2014 2:00 a.m.
Updated: August 21, 2014 2:00 a.m.

The Aug. 15, 2015, edition of The Signal contained an op-ed piece by Phil Kerpen entitled “A big new tax coming.”

The gist of Mr. Kerpen’s position was that Congress is going to add a new tax on Internet commerce by allowing the Internet Tax Freedom Act to expire.

The positions espoused in that piece are confusing as Kerpen intermingles the concept of taxing Internet access with the ability of states to subject online transactions to sales tax. It appears that he is against both.

However, the ability to collect sales tax on Internet sales is not as black and white as Mr. Kerpen suggests. The current situation effectively uses foregone tax dollars to subsidize the online retailers.

Under current law, states are precluded from charging sales tax on online purchases. However, states are not precluded from imposing a use tax on such purchases.

Use tax is a tax charged on the user, rather than the seller, equal to the sales tax that would have been paid for products consumed or used in the state.

Most states, including California, impose a use tax if they have a sales tax.

The problem with a use tax is that it is hard to enforce. Taxpayers have to voluntarily report their purchases either by filing a use tax return or by paying the use tax with their income tax returns.

Obviously, most consumers do not pay use tax, either because they are unaware of its existence or because they choose to ignore it.

The problems with this situation are multiple. Clearly, the online retailer has a competitive advantage because online sales are not subject to sales tax. Consequently, the traditional brick-and-mortar retailer is at a competitive disadvantage.

Finally, the shifting of commerce to a venue for which sales tax is not collected results in a decline in tax revenue, requiring state and local governments to either cut services or to raise other taxes or impose user fees.
The tax policy should not favor one delivery platform over another. All retailers should be in the same position from a tax standpoint.

As Mr. Kerpen correctly suggests, taxing online purchases will reduce the demand for such purchases. So where would those purchases go?

In large part, they would go to the traditional brick-and-mortar retailers in local shopping centers.

The mom and pop Internet-based retailers claim that it would be too difficult to collect and remit sales taxes to multiple jurisdictions.

This is a red herring. Software vendors have created database software that would determine the appropriate level of tax to collect based on the address to which the merchandise is shipped.

The funds collected would be deposited in a central clearing account until sales tax returns are filed and the funds are remitted to the appropriate tax authority.

The vendors could e-file sales tax returns using the same software that collects the tax in an automated process.

The administrative burden on Internet retailers would be no greater than those currently placed upon brick-and-mortar retailers.

The idea of facilitating sales taxes on Internet-based transactions may not be the most popular idea, but it certainly levels the playing field for all retailers, restores lost taxes that are no longer collected and will help the economy in the long term.

James P. de Bree Jr. is a Valencia resident.


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