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Online Sales Tax Not So Simple or Wonderful

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In the New Jersey Star Ledgers editorial, “A Level Field,” it is argued that it is time for online sellers to collect state sales tax.  The principle concern is that New Jersey is losing out on tax revenue.  But the issue is not that simple. There is the little matter of the interstate commerce clause in the US Constitution. In the case of Complete Auto Transit vs. Brady, U.S. Supreme Court said that collecting taxes on out-of-state sales is constitutional when:

1.  The activity taxed has a substantial nexus with the taxing state

2.  The tax is fairly apportioned

3.  The tax does not discriminate against interstate commerce, and

4.  The tax is fairly related to services the state provides the taxpayer

With this in mind, consider the example of a couple in New Jersey who goes online to the website of a California firm to buy a product made and shipped from New York State. Where is the point of sale? Which state can claim to have the most substantial nexus?  In which state are the most taxpayer supported services provided as related to this sales ransaction?

These are questions for those drafting the Market Place Fairness Act to consider.  If raising state revenue was the primary consideration, each state might decide to impose their own sales tax in the above example.  This situation would discriminate against interstate commerce.  More importantly, if raising state revenues is the issue then the obvious places to start would be the elimination of tax loop holes and sweetheart deals for businesses, elimination of the ridiculous tax loopholes for wealthy individuals, and maybe raising taxes on those who  financially benefit the most in New Jersey.  Sales taxes are already far too regressive and burdensome to the poor.



  1. TamrahJo says:

    Some years ago, I spent a year entering and splitting every single bookkeeping entry, so as to really figure out how much our family paid in ‘taxes’ every year – at that time, our Colorado Gasoline prices included a 50 cent or so per gallon tax in the price – (I can’t remember if it was 54.3 or 52.8 – but you get the idea…)

    Our phone bill at the time had 6 or 7 lines of various taxes/fees too…

    At the end of the year, counting city, county, state and federal taxes – our family paid out 42% of our income towards taxes –

    That same year, we drove over pot-hole filled roads and a cattle guard on a county maintained road collapsed as my husband was driving our car over it – resulting in a huge repair bill for a damaged gas tank.

    We are taxed so completely and thoroughly that I was surprised to learn there was actually legislation in place that might save us from further taxation….I suspect it will be changed to allow interstate taxation of goods – because I’m that cynical…

    • TamrahJo says:

      The percentage was much higher if I included other government regulated and required fees (vehicle registration, business registration, business permits for every locale I chose to business in…etc)

  2. DataHeart says:

    And what is a fifty-cents per gal gasoline tax to a person whose chauffer driver fills the tank? Sales taxes are very regressive and often hidden.

  3. avwalters says:

    I agree that sales taxes are regressive and, for that reason, problematic. However, if we are to collect sales taxes, we should do so fairly. Right now large corporations who deal on the internet are getting a huge competitive advantage over the mom and pops in your state who actually maintain a storefront, provide service and contribute to your community in a number of ways (employing people, paying taxes, etc.) It used to drive me crazy that my ex would go to a local business to shop, view the item, compare prices and then after taking advantage of the local “showroom” business, go online for a better price, tax-free. So yes, if we are going to charge a sales tax, we need to figure out the fair apportionment, in order to maintain a level playing field.

  4. DataHeart says:

    Thank you for responding, and I sympatize with your point. Small business brick and morter stores are taking a hit. Dispite all the business lobbies, no one is realy looking out for small businesses.

    But to make a point, we could decide that the point of sale for all internet transactions is where the end consumer lives, and so collect sales taxes for that state. But how does a seller know where a virtual consumer really lives? Do we base it on shipping address? That wouldn’t work. Do we based it on the billing address? I would run out tomorrow, get a PO Box in a state with no sales tax, change my billing addresses and pay my credit cards online. And how would we be able to keep track of all this? The whole thing is just very complicated.

    The bigger point is that the problem shouldn’t come up because we should outlaw all sales taxes. They are way too regressive. A less regressive alternative would be to allow a sales tax but tax every outlay even financial transactions. That would make sales taxes far less regressive. Or maybe we could require that sales taxes must be progressive. A state could has a tax of $0 on items under $100 and a graduated sales tax rate for items as they get more and more expensive.

    In any case, just think how much of a boost to small business it would be to do away with sales taxes all together.

  5. avwalters says:

    I like the $100.00 threshold. I also like a tax on financial transactions (but good luck with that.) I always thought such taxation could be used to further environmental concerns–perhaps cradle to grave assessments on the cost of goods and taxation accordingly. (Or to make ‘re-use’ items tax free to cut down on needless waste, though craigslist has essentially accomplished, just that.)

    • DataHeart says:

      The other benefit of a tax on financial transactions would be to slow down or eliminate the nano-speed traders that have become the ghost in the machine.

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