I received an invoice via email from NewEgg today. (NewEgg.com is an on-line retailer I sometimes use.) It included this text…
“Although Newegg is not obligated to and does not collect Colorado sales tax, this purchase is subject to Colorado sales tax unless it is specifically exempt from taxation. A purchase is not exempt from sales tax merely because it is made over the Internet. The State of Colorado requires Colorado taxpayers to file a sales/use tax return at the end of the year reporting all non-exempt purchases that were not taxed and to pay tax on those purchases. Colorado law states that retailers, like Newegg, that do not collect Colorado sales tax are required to provide you and the Colorado Department of Revenue with an end-of-year report of the total amount you purchased from Newegg during the year. Further information regarding Colorado sales tax, including details on how to file a sales/use tax return, may be found at the Colorado Department of Revenue’s Web site, www.taxcolorado.com”
I find it interesting that sales tax is not collected on sales to customers outside the state wherein the sale takes place. I suspect that this practice has its origins in Article 1, Section 8 of the U.S. Constitution which says: “No Tax or Duty shall be laid on Articles exported from any State.”
Decades ago, I operated a modest retail establishment as a side-line to my Day Job. One of my duties was to periodically tender to the state treasury a “transaction privilege tax” (sales tax) at the prescribed percentage for each item sold at retail.
Notably, I was required to tender these monies to the treasury regardless of whether I passed on to the buyer an amount equal to said tax. Thus, it seemed to me, this tax was not a tax on the “article” or buyer but on the seller, or, as the name implies, a tax paid for the privilege of conducting the transaction within the state. Thus, if selling to an out-of-state buyer, the tax is laid not on the “exported article” but on the seller.
Eventually, there will be some sort of “Internet sales tax.” Doubtless it will involve huge amounts of record-keeping, much like what NewEgg is required to do for the state of Colorado. But it needn’t be complicated and messy.
It seems to me (IANAL) that a tax could be so laid on out-of-state sales as to not run afoul of the Constitution’s prohibition on taxes and duties on exported articles. Indeed, tax the seller, or tax the transaction on all sales within the state regardless of whether the buyer is within the state or without.
This would be simple to implement, use existing sales tax collection/reporting/tendering mechanisms and would cover all sales, including “Internet” sales to out-of-state buyers.
But this simple solution will likely never come to pass. Why, you ask? Because it creates a system in which states with high sales tax rates would lose sales to states with little or no sales tax. It would create, in a word, “competition” in the market for sales tax. Governments hate competition. States at risk of losing large retailers would feel pressure to reduce their own sales tax rates.
On-line business of sufficient size would find it worthwhile to move to low-tax states, the better to remain competitive.
Bottom line, it would seem that a sales tax law could be so crafted as to permit taxing out-of-state sales yet avoid the prohibition on laying taxes or duties on items exported from one state to another. The big question is whether SCOTUS would overturn such a state law. Given the Supreme Court’s propensity for hair-splitting, certainly it could conclude that a sales tax on an out-of state sale did not run afoul of the Constitution. But would it?