Category: business

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.

The US Constitution clearly prohibits states from taxing interstate commerce, as SCOTUS confirmed in the Quill decision. Unless a business has a physical presence in a state, that state cannot tax transactions between that business and a resident of the state.

Cash-strapped state governments and brick-and-mortar retailers wish desperately that were not true, the states because they want more money and the retailers because they want to force sales to their local stores. Several states, North Carolina among them and most recently California, have passed laws on the dubious theory that affiliates constitute a legal nexus for taxation.

But, no matter how dubious that theory, at least it’s used to enforce sales tax collection, which is Constitutional. What seems to skate beneath notice are use taxes, which are not. All states that have a sales tax also have a use tax. A resident from one of those states who purchases something from a vendor in another state is legally obligated to pay the use tax, which is invariably calculated at the same rate as the sales tax, and is simply a transparent attempt to violate the Constitutional prohibition on taxing interstate commerce.

North Carolina goes further than most states. Every year, when I do our state income tax return, I have to fill out a section on use tax. North Carolina offers residents a choice. Other than for major purchases, which always require paying use tax on the actual purchase price, we can either pay use tax on actual purchases or on estimated purchases as a percentage of adjusted gross income. That percentage is small enough and we buy enough on-line that it always makes sense for us to use the estimated method. In effect, we usually end up paying something like 1% or 2% use tax rather than the nominal 7.75%. Still, it’s perfectly legal for us to choose the estimate method.

It’s also perfectly unconstitutional for North Carolina to impose that tax, intended as it is to get around the Constitutional prohibition on taxing interstate commerce. The problem, you see, is that North Carolina charges use tax only for purchases that did not incur sales tax.

For example, if I buy a $100 widget in a local store, I’m charged $7.75 sales tax. If I buy that $100 widget on-line from an out-of-state vendor, I am (at least in theory) required to pay a $7.75 use tax. So far, so good. The problem is, when I buy that widget at the local store, I’m charged only the $7.75 sales tax, rather than the $7.75 sales tax PLUS the $7.75 use tax. Because the use tax is not charged on in-state sales, it is discriminatory and a violation of our Constitutional right not to be taxed on interstate commerce.

I keep hoping that someone will pursue a case against a state government and take it all the way to SCOTUS, because use taxes as currently implemented are prima facie not Constitutional.