Speaking of sales taxes …

North Carolina’s sales tax just dropped 1% because the legislature allowed a 1% temporary surcharge to expire as of this morning. The tax rate in Forsyth County, where we live, and most of North Carolina’s other 99 counties dropped from 7.75% to 6.75%. I just updated my PayPal profile to reflect that change. People who order our chemistry kits for delivery to North Carolina addresses now pay about $1.50 less in sales tax.

I got to wondering why we have a sales tax at all, and, if we must, why that sales tax is considered to be due from the buyer rather than the seller. (As a business, we’re responsible for collecting the sales tax and forwarding it to the state, but it’s the buyer who’s considered to be paying the tax.)

As things stand, if someone from North Carolina orders one of our kits for $150, we have to collect that $150 plus 6.75% sales tax, for a total of $160.13. Of that total, we send North Carolina the $10.13 sales tax. Nor are we paid for collecting and forwarding that sales tax, which seems inequitable.

I have a brilliantly simple revenue-neutral proposal that would address the problem states have with collecting sales tax from out-of-state vendors on sales to state residents, and would not fall afoul of Constitutional interstate commerce provisions. Abolish the sales tax and the use tax entirely. Replace them with a simple tax on gross revenue on any business within the state.

As things stand now, if someone orders one of our chemistry kits for delivery to an address outside North Carolina, we collect $150, North Carolina collects nothing, and the state where the kit is delivered (probably) collects nothing. If someone orders a kit for delivery to a North Carolina address, we collect $160.13, and North Carolina collects $10.13.

Under my proposal, anyone who ordered one of our kits would pay $160.13 and the state of North Carolina would collect a revenue tax at about 6.32% of $10.13 on every kit we sold, regardless of delivery address. Conversely, when a North Carolina resident ordered something from an out-of-state vendor, North Carolina would collect nothing, nor would they be entitled to do so.

If every state implemented such a tax, which they soon would, it would be each state’s businesses that were paying rather than each state’s consumers. When anyone from any state ordered product from us, they’d be supporting North Carolina government services, just as when I ordered anything from any of the other 49 states, I’d be supporting that state’s government services. Everyone would pay the same regardless of where they lived or where the company they ordered from happened to be.

Tax collection would be dramatically simplified, both for retailers and the government. And there would be no Constitutional complications, because each state would simply be taxing the gross revenues of businesses that operated within that state. States would be motivated to keep that revenue tax rate as low as possible, to keep businesses in their states competitive with those in other states, and would also be motivated to make their states as business-friendly as possible to encourage the growth of businesses that would get them “free money” from customers in other states.

 

29 thoughts on “Speaking of sales taxes …”

  1. Well if you’re just selling goods then I guess the gross revenue would work. However take something like car repair. Here in California there is sales tax only on things such as parts or consumables like oil. There is no tax on labor which more often than not is the major share of the bill. There are other non-tax item such as delivery (even though many places like to charge ‘handling and delivery’ which is just a money grab). If you do like myself and just bill for services you’d really get screwed. I do of course have to pay income tax on my net profit.

  2. Yes, the revenue tax would have to be on both goods and services, but that’s happening already as the US transitions to an increasingly service-based economy and various states implement sales taxes on things that were not formerly taxed. It would also have to be uniform on all transactions, including revenue from sales of items such as food and clothing that some states exclude from sales taxation or tax at a lower rate. Still, a uniform tax rate on all business revenue is no problem if the rate is adjusted to compensate. In North Carolina, we currently pay 6.75% on nearly all goods including prepared foods and restaurant meals, but are taxed at 2% on food items at the supermarket, excluding prepared foods. Levying a revenue tax on businesses that covered all revenue, including services, would allow the rate to be set at a small fraction of the current sales tax rate while remaining revenue-neutral.

  3. I just ordered a pair of shoes from Zappos and they apparently have no B&M here, so I’m in for the price as listed:
    http://www.zappos.com/new-balance-classics-v45-white-navy

    So, what we have here is the politics as usual, deflection of attention by presenting a series of false alternatives, one of which is collecting sales taxes on internet purchases to maintain “fairness” with B&Ms.
    Now, as example of false alternatives is when your Dr. says that you are 20# overweight and should he amputate your right arm at the shoulder or your lower left leg at the knee?
    Note that Nevada does not have a sales tax, but that is not offered as a rational alternative here to level the playing field.
    Note that one of the largest Amazon distro centers is in Fernley NV:
    http://en.wikipedia.org/wiki/Fernley,_Nevada

  4. I guess even a cowboy wears sneakers sometimes, but you are really damaging your image Slim. Do you switch to a baseball cap when you wear them?

    Also, did you know that Amazon owns Zappos? It operates independently, or such is my understanding.

  5. In theory, a gross revenues tax would be much better than a sales tax. Why is the sales tax in North Carolina only 6.75%? Because every time you buy something it shows up on the receipt. If it was formed as a general revenue tax, then every time the state found itself without enough money, the legislature would make the tax 1% higher. Because everyone who doesn’t own a business “knows” that all business owners are rich and can afford it.

  6. As of today California sales tax drops by 1%. That’s 7.25% here. Some counties and tax districts have additional taxes so their rates may be higher. One great irritation of mine is being charged LA or SF taxes rates when buying via online or phone. Theirs are almost always higher by 1-2%.

  7. It does not surprise me that Zappos is a subsidiary of Amazon.

    Well, I do feel it appropriate to change out of boots, jeans and a wide brimmed hat for the tennis courts.

  8. What’s the flaw in the argument? Multiple taxation. A dairy farm sells a gallon of milk to a bottler for $3. The bottler sells it to a wholesaler for $4. The wholesaler sells it to a grocery store for $4.50. The grocery store sells it to the customer for $5. Each one of these sales is revenue, so the state gets to tax the same gallon of milk 4 times. This distorts efficient commerce, since the dairy farmer might benefit by doing (inefficient) bottling himself just to undercut a bottler who has a tax disadvantage.

    Thus, the right answer is not a revenue tax but a Value Added Tax. These are common in Europe, often with rates on the order of 15 to 20 percent. There’s a lot of smuggling of small expensive items (like cell phones or jewelry) to avoid the VAT.

    The big downside of a VAT is extra accounting. Every business has to start tracking and reporting net revenue of each product, even if they’re not for end customer use. A quarry sells rocks to a concrete maker.. with a sales tax, it’s business to business, no sales tax, no accounting needed. With a VAT, you need to track the cost of each rock, which rocks got extra processing, track how different batches of identical rocks with different purchase costs over time get re-sold etc. Everyone needs to account for every step. It sucks.

  9. Multiple taxation is no flaw. It’s a feature. That’s why I mentioned “a small fraction”, as in perhaps 1% or less.

  10. Steve says “Thus, the right answer is not a revenue tax but a Value Added Tax. These are common in Europe, often with rates on the order of 15 to 20 percent. There’s a lot of smuggling of small expensive items (like cell phones or jewelry) to avoid the VAT.

    The big downside of a VAT is extra accounting. Every business has to start tracking and reporting net revenue of each product, even if they’re not for end customer use. A quarry sells rocks to a concrete maker.. with a sales tax, it’s business to business, no sales tax, no accounting needed. With a VAT, you need to track the cost of each rock, which rocks got extra processing, track how different batches of identical rocks with different purchase costs over time get re-sold etc. Everyone needs to account for every step. It sucks.”

    So, the right answer is ridiculously high VAT taxes, that promote smuggling and bog businesses down in red tape, and is described as something that sucks? Seriously??

    I’m with Bob on the revenue tax, and will go one further and say charge 0.2% more and pay that back to the business as a tax refund to cover the cost of collecting the tax.

  11. I already run my business like that. I’m in Arizona and treat the sales tax here as X percent of the price, regardless of where the order comes from. Makes sense to me, as I live, work and conduct business here. These are my streets and roads I’m using to get to the Post Office to mail product.

    If I’m reading the regulations correctly, the Arizona sales taxes are actually taxes on my business which I am entitled but not required to pass along to the buyer. And if not, well, it’s a very very tiny business, anyway.

  12. VAT really is not that complicated. Anything you sell has VAT on it. Anything you buy has VAT on it. Subtract the latter from the former, and you have your tax bill. Of course, it isn’t really quite that simple, but that’s the general idea.

    The theory behind VAT is that sales tax is really a rather unfair tax, in that it only applies to retail purchased by individuals. This is a lot of tax applied to a single point in the market, and encourages tax evasion; for example, if I run a proprietership from home, then just how many of my private purchases can I bury in the business, to avoid sales tax? VAT applies equally to private and business purchases, so the incentive to cheat is reduced.

    What VAT does not support is a wide variety of different tax rates. In Europe, VAT tend to be applied at the state or national level, while towns and counties rely on other types of taxes. Sales tax is applied willy-nilly by towns, counties, and states, resulting in a quilt of different rates. This would make calculating the VAT deductions nearly impossible.

  13. If we have to have taxes, I think they should be fairly distributed. My first choice would be a flat tax (dollar amount, not percentage). For example, everyone pays $1,000 per person, including children, and that money is then distributed at the federal, state, and local level. Anyone who can’t or won’t pay is exported to, say, Mexico. (That would, after all, be only fair.) My second choice would be the type of tax I just described, on business revenue, which of course is ultimately paid by the consumer. That’s a bit less fair, because richer people typically buy more and therefore have to pay more taxes, but it’s a lot more fair than things like income taxes or property taxes, both of which are based on ability to pay.

  14. The Province of BC is currently undergoing a referendum on a new tax the incumbent government tried to shove in last year. We used to have two sales taxes: PST (Provincial Sales Tax) and GST (Goods and Services Tax and is a Federal tax). 7% PST was applied to all retail items, other than children’s clothes and most foods (convenience foods like TV Dinners were taxed), and labor was exempt. 5% GST applies to everything, including labor, food and children’s clothes. Last year the gov’t merged the two taxes into the 12% Harmonized Sales Tax, which they claim aren’t new taxes, except that the HST applies to everything, so items that were previously exempt are now taxed at 12% (the only exemption is on unprocessed foods).

    Taking a card from the TEA party, we bitched and moaned until the provincial government realized that their existence in power was hinged on this item. We are now slowly collecting votes for or against. I for one hope they strike it down. I don’t think the government has any right to collect taxes from my labor, or from the sales of goods that I have previously bought, paid for and paid taxes on.

    We need a single tier of taxes. Fix a flat rate on income (revenue for business) and eliminate all sales taxes.

  15. I remember when I was about 4 years old, someone mentioned that taxes were voluntary. Even at that age, my first thought was “why would anyone pay them?” and my second thought was, “I’m not gonna pay them.” Obviously, they lied to me.

    To this day, I think that all taxes should be voluntary and that all government services should have to compete with private alternatives. If there is a government service for which no private alternatives exist, that’s a damned good indication that the government shouldn’t be doing it in the first place.

  16. When my youngest son was six he was given some money as a birthday gift and we went to the toy store to spend it. When he got to the till, he asked why the price went up. The clerk explained that the item was taxable, and he declined the purchase as it was “not worth the cost”. To this day, he is a regular skinflint with money. A good lesson to learn at a young age!

    I like the voluntary part about paying taxes. Too bad we were ‘volunteered for life’ already.

  17. I’ve always been annoyed when tax is added at the POS. If the tax is voluntary, that’s fine, but if it’s compulsory then why not just factor it in? This sort of thing caused some embarrassment when I was on a coach tour of Spain: I bought a bottle of water from the room fridge, it was 2 X (whatever the currency of Spain was in 1993). On checkout I paid the 2 X and started walking away. The clerk yelled out to me as if I was doing a runner and said that the actual price was 2.06 X, including tax. How embarrassing and how stupid.

    At least down here that can’t really happen. If an item attracts GST it’s illegal to advertise it at the non-GST price. It has to be included, so there are no unpleasant surprises at the till.

  18. “To this day, I think that all taxes should be voluntary and that all government services should have to compete with private alternatives. If there is a government service for which no private alternatives exist, that’s a damned good indication that the government shouldn’t be doing it in the first place.”

    What about natural monopolies like defence? I could understand competing police departments in a city, but would you want competing armies, navies, air forces, SACs?

  19. There’s really no such thing as a natural monopoly. I’m an anarchist. I don’t believe we should have any government at all. And I certainly don’t believe that we should have standing armies and navies. What purpose do they serve? If, say, the Chinese decided to invade North Carolina, they’d quickly find Good Old Southern Boys (and Girls) shooting at them from behind every wall and tree. And folks like me would be making IEDs and other nasties for them to use against the invaders.

    As the superpowers have learned repeatedly–from the US in Viet Nam to the USSR in Afghanistan to our current mess in the Middle East–their armies and navies do them little good when they try to use them against armed civilians. The only thing armies can beat is other armies and governments. They can’t do a damned thing against an armed populace.

  20. “At least down here that can’t really happen. If an item attracts GST it’s illegal to advertise it at the non-GST price. It has to be included, so there are no unpleasant surprises at the till.”

    This always gets me when I visit the USA. Pick up an item, note the price, go to the cash register, and … huh? That’s not what the price is!

  21. Come visit Oregon. One of the few bright spots in the tax system here is that we have no sales tax.

    Rick in Portland

  22. Same as Alberta, though the GST is applicable to all retail sales. They get a lot of revenue from the oil sands, and don’t need to rape their citizens.

  23. “There’s really no such thing as a natural monopoly. I’m an anarchist.”

    Yes, for the 0.1% of the population who are anarchists that’s a perfectly valid opinion. For the rest of us it isn’t.

    The one thing my friends agree about is that anarchism won’t work, and belongs in the stone age.

  24. Oh, well. If your friends all agree, who am I to differ? Of course, anarchy worked pretty well for Ireland for several hundred years. To this day, that’s why the English don’t trust the Irish. The English would invade, defeat some Irish king or another, and he’d surrender. What the Brits never understood was that that Irish king was surrendering only for himself, not for the Irish, nor even for the soldiers under his nominal command. He was king only on sufferance. As soon as he surrendered, they’d choose a new king. Incidentally, I think you make the common error of confusing anarchy and chaos. They’re two entirely different things.

  25. No, I don’t confuse anarchy on the one hand and chaos/bomb throwers on the other. I’ve just not seen a decent explanation for how it could work in a modern society. And if Ireland was once an anarchy it sure isn’t now.

    I read a book on anarchism by Noam Chomsky, which impressed me even less than his other books. I’ve never seen a decent explanation for how it would work *today*. And sarcasm about my and my friends’ opinion of anarchism doesn’t win the argument. If anarchism was such a good idea how come people don’t vote for anarchists? Yeah, a few libertarians get elected but that’s completely different from anarchism.

  26. If, say, the Chinese decided to invade North Carolina, they’d quickly find Good Old Southern Boys (and Girls) shooting at them from behind every wall and tree. And folks like me would be making IEDs and other nasties for them to use against the invaders.

    What if the invasion included bombs dropped by planes? How many GOSBs have fighter jets parked in their backyards?

  27. Who are you going to drop them on, and to what purpose? Dropping bombs doesn’t win territory. It just pisses off the people you’re dropping them on. As someone famously commented, you don’t hold ground until you have a 17-year-old kid with a rifle standing on it. And even then, getting it and holding onto it are very different things.

  28. Who are you going to drop them on, and to what purpose? Dropping bombs doesn’t win territory. It just pisses off the people you’re dropping them on.

    My point was what’s the countermeasure to enemy bombers if there is no standing armed forces?

  29. Duck and cover, which is what all standing armies do when bombs get dropped on them. A standing army does not protect anybody from aerial bombardment. A standing army does nothing but eat taxes, and eventually somebody realizes that they have a hammer in their hands, and all the problems start to look like nails.

    We bombed the shit out of Europe and Japan during WWII, and until the US dropped two nukes, not one of the thousands of bombs ever caused a country to surrender. Heck, we more than bombed the shit out of Southeast Asia, and that worked out so well for the US.

    And just who is going to be in a position to bomb the US? Canada? Hell, Rhode Island probably has a better air force, probably a better navy, to boot. Mexico? Venezuela? There won’t be any bombs dropping in the CONTUS, unless DC does the dropping.

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