Response: Time Magazine Cover Story – The Broken States of America

ILLUSTRATION BY JOE ZEFF DESIGN FOR TIME - Image Courtesy of Time, Inc.

I trust you have already seen and read the cover story of Time magazine this week, but if you haven’t, check it out now.

The article does a masterful job of describing the current financial crisis in most states. It even  details how the states have not seen such financial calamity since the Great Depression. Strangely, though, the article does not address the action states took after the Great Depression to ensure such a situation would never happen again. Since you are reading our blog, you probably already know what they did: They created the sales and use tax system.

Their goal at the time rings true to this day, more than 70 years later. The purpose of the sales and use tax paradigm was to have a more progressive, consumption-based system of taxation. After establishing sales and use tax as a way to finance local services, many localities were able to fund up to 40% of their annual budgets through the collection of sales taxes. Unfortunately, the brightest minds of the 1930s could never have imagined a marketplace of the scale and ubiquity of the internet. As shoppers have migrated online, largely for convenience, the practice of collecting local sales taxes at the time of the transaction has not migrated with them. And now that the internet marketplace is maturing, local governments have seen proceeds from sales taxes drop to approximately 16% of their annual budgets—hardly a coincidence.

Most internet merchants do not collect local sales taxes because the Supreme Court, in 1967 (Bellas Hess) and again in 1992 (Quill), ruled that it would be too difficult for a “remote seller” (mail-order catalogs at the time) to calculate and remit local sales taxes for the thousands of tax jurisdictions in the country. In these rulings, the court did point out that one day technology would likely solve this problem, but even then, they said, only an act of Congress could grant states the authority to compel out-of-state merchants to collect sales tax (just as bricks-and-mortar merchants are required to do). Today, many internet merchants rely upon the Quill ruling to justify their non-collection of sales taxes. (Ironically, the Quill Corporation, which litigated this matter against North Dakota all the way to the US Supreme Court in 1992, now collects sales taxes on all their internet sales—even in states where Quill Corp. has no physical presence.)

Hopefully a few of our legislators in Washington, DC, will read the Time magazine article and agree with us that the time has come for federal legislation requiring out-of-state merchants to collect local sales taxes. It is time to introduce (and pass) the Main Street Fairness Act. The Main Street Fairness Act does not contemplate or suggest any new taxes; it simply allows states to require merchants to collect sales tax at the time of a transaction, instead of relying upon the consumer to report and pay these taxes later.

Regarding the Supreme Court opinion that collecting sales tax is too difficult for remote sellers: Our TaxCloud service launches tomorrow! TaxCloud manages local sales tax calculation for every jurisdiction in the United States. In the 23 (soon 24) states that conform to the Streamlined Sales and Use Tax Agreement, TaxCloud also manages collection, remittance, and sales tax returns for all TaxCloud registered merchants—all for free.

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