North Carolina Tries to Tax Online Purchases

Anonymous Coward wrote with a link to this News-Observer story. AC says the "...NC State department of revenue has added an additional line to the NC Individual Income tax form requiring consumers to calculate how much they spent for goods online and pay taxes on it." Meanwhile, Parothed sent a link to an article that implies that the (heavily libertarian) Cato Institute's Center for Trade Policy Studies might just find the North Carolina Internet tax plan acceptable.

Um, check with your accountant, but . . .

Chances are, you are already required to pay "Use Tax" on any purchase you failed to pay sales tax on. Most states already require this.

Sure, for Joe Sixpack, the issue may never come up. If you get audited, it could look bad, but that's about it.

For a business on the other hand, it could get very ugly.

Of course, I live in Utah, where the tax comission motto is "Tax anything that moves, and levy a fine on inanimate objects". We've got it all. 6.25% sales tax, state income tax, the whole deal.

These jokers once pressed for a 1/4 cent email tax, before a local ISP explained to the state legislature that they handle close to a million individual email messages a day, and would go out of business in about 16 hours if asked to pay that tax.

Re:Maybe not that bad?

The rules that govern the Internet is the same that has governed mail-order catalogs. The upshot is that the Supremes ruled a while ago that it is burdensom for a mail-order catalog who doesn't do business in a particular state to have to keep track of every state, county and municipal tax that is owned throughout the nation. They basically said that this undue burden is contrary to interstate commerce, which is one of the cornerstones of the US Constitution.

When a store does business in a particular state, however, the US Constitution's interstate commerce clause doesn't apply, and the store is on it's own--at least within the confines of that state.

The reason why the states have all decided they want to tax the Internet is because of all the predictions made by pundants that on-line commerce will represent about 3000000000% of our GDP within the next 15 minutes. (Or something like that--I can never keep track of the exagerations^H^H^H^H^H^Hpredictions.) And the states are upset because they think all that tax revenue that would have otherwise been spent at the local store is being spent on-line instead.

So as far as the states are concerned, interstate commerce be damned! they want their tax money.

I forsee a constitutional battle in the next 10 years. Ought to be interesting.

Legality of it all

So, a few things to ponder:

Article 1, Section 9, Clause 5 of the US Constitution:

"No Tax or Duty shall be laid on Articles exported from any State."

The Internet Tax Freedom Act, sect 1101(a):

"No State or poilitical subdivison thereof shall impose any of the following taxes during the period beginning on October 1, 1998 and ending 3 years after the date of the anactment of this Act --
[..] (2) multiple or discriminatory taxes on electronic commerce"

Internet Tax Freedom Act, section 1104 ("Definitions"), section 2:

Discriminatory tax -- The term "Discriminatory tax" means --

(A) Any tax imposed by a State or political subdivision thereof on electronic commerce that --

(i) is not generally imposed and legally collectible by [...] on transactions [...] accomplished through other means;

[...]

(iii) imposed an obligation to collect or pay the tax on a different person or tentity than in the case of transactions [...] accomplished through other means."

There are other problems: Purchasing items sent as gifts to people in other states, purchasing items that are not subject to state sales tax.

Re:Why pay sales tax?

I'm not sure you can classify all consumption as "economically destructive" - perhaps environmentally destructive, but in a society with a high population density & a finite money source, you NEED consumption so that everyone can earn a living by providing goods & services to each other.

If you encourage TOO much savings (socking the money away in a mattress, for instance), then the money which is accumulating doesn't really do anybody much good (including the person doing the savings!) except as a warm, fuzzy "secure" feeling.

This bad situation holds true for any situation where large amounts of money are "trapped" - for instance, when a small number of rich people in the economy hold most of the money, and the "poor" people don't really have much left over to buy anything.

Heh...if you want to keep income churn going, then you could do a tax based on ASSETS rather than income or consumption, probably with something like the first $200,000 exempt). That'd kind of take the shine off of accumulating large amounts of paper wealth, eh?

Of course, you'd have to make sure that money gets back into the economy at the bottom level so that it does the general populace some good. (No, Virginia, I do *NOT* believe in supply-side economics - except as a way for rich people to get first crack at the money!)

So?

Theoretically, there should be no difference if I buy something by mail order or online. If it's OK to tax me for the former, it should be OK to tax me for the latter. (and I said *if*)

Like it or not, the net has gone business. Taxes are a part of the meat space business. It is hardly fair against meat space stores if they have to pay taxae, that their online competitors have not.

That said it is not so easy to tax the net (fortunately). I am a swedish citizen. Suppose that while I am in France, I step into an internet cafe (owned by an Israeli) and buy a Chinese product from a australian company, registred in the .com domain, that has its servers in Japan. Which law applies?

Of cource I choose to follow the law most beneficial to me. (That is I say nothing, hoping to slip between the systems).

Of cource, local and national goverments will try to impose taxes. They will fail horribly as long as the net is not own by any country (including the US thank you).

Is this a problem? Yes of course, but it is a problem that "we" can take advantage of. Enjoy your freedom while it lasts.

I hate this attitude

You should be looking at it as, "I don't pay tax on my online shopping, shouldn't I then be free from sales tax when I buy in a regular store? If not, why?"

No offense to you personally, Tyrell, it just seems like more and more people accept constant taxation in their lives these days. We should really take a hard look at the situation and wonder just why we're spending so much.

Cheers,
[e-mail]

What right does NC have to this money?

I'm the slightest bit curious why NC (or any other state trying to tax the 'net) thinks they deserve a share of this money? It is my understanding that the primary justification for a sales tax is because it costs a city/state quite a bit of money every year to maintain a good enviroment for business to function (road work, police coverage other basic services) By this logic taxing transactions at brick and mortar shops makes sense. However it falls apart when applied to internet transactions. The user already pays for the services that make ecommerce possible: 1) phone line to the local utility 2) account with ISP. Now I know the utility is paying a tax on it's profits to the state and so is the ISP, therefor the state is still getting it's money. And if any e-business's are being run out of NC you can be sure that they too are paying income tax. In addition anybody employed by this e-business in NC is paying a sales tax on all the purchases the make locally. With that logic in mind NC should permantly ban the idea of a 'net sales tax, give lots of incentives for high tech and ecommerce companies to set up shop there and make the whole state a haven for e-business. Then they would make up the tax revenue lost to ecommerce, and would annoy the people alot less every tax season.
Trying to tax internet purchases is a step in the wrong direction anyway and is probably supported very strongly the brick and mortar business's in NC, who would rather have the government hamstring their competition rather than rework their strategy to stay competitive. It's not the actual tax amount that is going to cause people worry, it's the fact that now everytime they surf over to Amazon.com or wherever they are not only going to be thinking about price and quality of service, the concept of saving all their 'net receits for a year and figuring up the totals and the taxes due carries a high "pain in the ass" factor that will discourage people from shopping online because in some cases it will become less convienent than driving to the mall. Thus this new tax will seriously undermine one of ecommerce's biggest competitive advantages. On the other hand I suspect most people to ignore the idea, take a wild (low) guess at tax time and ship NC an extra 20 bucks rather than deal with the hassal of actually keeping track of everything they buy online, I know I would.

Once again glad I live in Alaska, where even the government doesn't trust the government ;->

Miscellaneous Anarchistic Thoughts

IIRC, if you're a resident of Florida, you're supposed to pay sales taxes, even on goods purchased out of state and brought back into the state. They had some obnoxious commercial about it once when I was down there. I remember watching it and thinking "That's gotta be the single most ignored tax law in the history of history." It's amazing what the assorted governments will try to get away with if you let them. Another story goes that when IBM opened their Boca Raton plant, some lawmakers in Florida got the big idea that they could tax IBM on its entire revenue worldwide because they had a plant in Florida. IBM promptly threatened to pull out of the state completely and move somewhere more commerce friendly and the plan was subsequently dropped.

Anyway, as taxes goes, this one has quite a few benefits. First of all, it's highly visible to the taxpayer. Unlike almost all other taxes, which are collected for you for about 90% of the tax paying public, John Q Public will be seeing exactly how much money is going to the state. Maybe he'll start demanding more justification as to how that money's spent. Second, it's easily ignored or avoided. This might even prompt the faster development of the anonymous E-Cash that is an inevitable development of the net. Finally, it doesn't try to force the vendor to support every tax juristiction on the planet.

The various governments trying to tax net transactions (And everything else) is most obnoxious. But we all know it's inevitable -- they all have to have their greedy little fingers in every pie they can get their hands on. While we can slow the progress by fighting tooth and nail against net taxes, more progress would be made (IMHO) by demanding more accountability for the use of those funds once they've got them. Demanding justification for every penny they spend and every pay raise they vote themselves would be a much more effective deterrent against future taxes than anything else we could do.

Why encryption is important.

This is the real reason the government doesn't want strong public encyption. It threatens their ability to tax. If all transactions are encrypted and privacy exists (i.e., - companies don't distribute 'marketing data'), then there is no way for them to prosecute or collect.

What we need is a government that only protects individual rights. No more and certainly no less. Health care, education, roads, et al. are not rights. Life, liberty, property, and privacy are rights and they are not-so-slowly being cut away.

This is especially important because we live in a service economy. That's where the money is. (Look at Red Hat.) If the government continues its monopoly on services, there will come a day when the people say no more and then the government will hand off that monopoly to some corporation (like Microsoft, for education!) and then we'll really be screwed.

This is civilization. The progress to a private society. It used to be that the government controlled everything. Then century after century they controlled less and less. Some societies survived the transistions well (Ancient Greece). Others didn't (the Pharohs). And in some places people became slaves of monopolies granted by the government (Rome/Feudal Society).

The US survived the industrial revolution because of the ideas of Aristotle and Locke. It almost didn't (The War Between the States).

We are faced with a new revolution. Call it what you will, define it as you like, but be reasonable. Some call it the 'Digital Revolution', some call it the 'Internet Revolution' and I'm sure there's a million other names that focus on different long-term changes that we barely notice because our lives are so short (and that's changing too).

The fact remains that we are thinking animals. We survive by our good ideas and die by our bad ones. Human evolution is intellectual. Since we became human we have changed our environment to fit our needs, but we often neglect to change our ideas to fit the environment we create.

"My privilege to write these sanguinary sentences in soft security was bought for me by rivers of blood poured upon many fields, in many lands, but I possess not one single little paltry right or privilege that come to me as a result of persuasion, agitation for reform, or any kindred method of procedure." -- Mark Twain

Can we change?

Constitutionality

I have watched a bit of CSPAN over this. It seems that local governments claim that they should be compensated for the money the lose to ecommerce.

But didn't the "founding fathers" explicitly abhor arbitrary taxation? I mean that was what the revolutionary war was supposedly about. Governments can tax citizens, but /for services rendered/. Governments cannot extract arbitrary taxes because they want to. For a brick-and-mortor storefront, the government provides the land, the streets, the legislatural and financial infrastructure to support businesses, etc. But /what/ does the government provide for ecommerce? Not much really. You could make the case that the /federal/ government helped ecommerce, because, of course, they started ARPANET, and provide funds to institutions and companies that support the backbone. So indirectly, by supporting the internet, they support ecommerce and should be paid a small tax by corporations and individuals using ecommerce. But this certainly wouldn't be a /local/ government issue. I mean, any one state shouldn't be able to dictate a different tax than another. But still that's a tenuous argument. The federal government, as it should, hasn't been innovating or supporting the internet directly for decades.

I think there is really very little to justify an internet tax.

Jazilla.org - the Java Mozilla [sourceforge.net]

Use Taxes, Speed Limits, and Other Unenforced Laws

Use Taxes are on the books in many states. These are unevenly enforced at best. The cynic in me feels that compliance with Use Tax reporting is like compliance with the posted speed limit on Interstate highways -- anyone who does get busted would logically conclude that they were the victim of highly selective enforcement.

What's next, a quota system for NC State Department of Taxation auditors?

I think the Charlotte News & Observer got it partly right in the article [news-observer.com] when they said:

The consumer use tax is not new. Most states have one. In fact, it's been on the books in North Carolina for more than 60 years.

It's never been aggressively enforced on individual consumers, Collins said, because it's difficult to chase down who bought what. The Internet has changed that, though, making most purchases as easy to track as scanning a credit card bill. And by adding a mention on the tax form, the state can penalize consumers who refuse to 'fess up.

One really obvious bogus statement in this article is that the Internet has eased the process of determining Use Tax violations in the event of an audit. Anyone who lives in the Northeast where states are geographically small, or shops by mail order or while on vacation has had their lack of compliance documented for years. Why say something so obviously wrong and ruin an otherwise useful article?

A small criticism of the "Slashdot Powers that Be". I realize it's a holiday week and we're all partying, but.... next time, insight should be applied to the analysis of the article before it hits the Slashdot home page. It would have been much more useful to have characterized this step taken by North Carolina as an attempt to increase awareness of their existing Use Tax among consumers who do some shopping on-line or through traditional mail order. That's not nearly as exciting to most people as the headline lead you to believe, but it would have been more accurate.

The big question about these sorts of efforts, in my opinion, is where will the states come up with the money to enforce this law? This is where the analogy to the speed limit really works. You could pull over a lot more speeders if you wanted to put a lot more police in cars with radar and laser speed detection devices. But, then a whole new set of questions will arise.

I expect the states to do little to increase enforcement of Use Tax reporting. Some over-zealous states will probably pick a couple of cases to really screw-over some taxpayers in a public way. This will get press in the newspaper and on TV in a way that will be designed to scare people. This actually serves both the media's and the government's interests.

--

Dave Aiello