Mimsy Were the Borogoves

Editorials: Where I rant to the wall about politics. And sometimes the wall rants back.

Origin vs. Destination sales taxes: where should Internet taxes go?

Jerry Stratton, April 1, 2020

Texas taxes

Destination-based sales tax means knowing the exact color of every dollar sign, or face fines, court costs, even imprisonment.

I’m still discovering amazing ways that Texas does things right, such as zero-based budgeting. It uses the remarkably sane, for politicians, rubric of starting a budget with how much money you have, not how much you want to spend. Recently, I discovered that Texas also uses what are called origin-based sales taxes instead of destination-based.

I didn’t know anyone was using this when I wrote in Punishing low-tax states back in 2006 that the obvious solution for Internet taxes was levying sales taxes based on the seller’s location rather than the buyer’s. It’s great to hear that my home state uses the simpler, more intelligent system.1

An origin-based sales tax is simpler to calculate, harder to pass the buck on, and more protective of our privacy. So, of course, politicians hate it. Texas Comptroller Glenn Hegar wants Texas to change to the more complicated system:

…as e-commerce continues to grow, more and more taxpayers will begin to ask why they are paying local sales taxes that are not going to their local communities and instead are going to some far away city.

This makes no sense. When someone drives from Round Rock to Burnet to buy something, they are not confused about where the sales tax goes. The same should be true of buying something from a Burnet seller online.

According to the article, “Texas is an origin-sourced sales state, meaning taxes are remitted where the seller is located.” That’s the natural way to assume that sales taxes work. Making taxes go to where the purchaser lives rather than where the seller lives is the confusing policy. It makes no sense, it complicates the otherwise simple process of multiplying one number by one other number.

Destination-based sales taxes, especially on the Internet, require all sorts of anti-competitive spaghetti laws to implement. My guess is that’s why the big Internet companies have stopped trying to fight them. Destination-based sales taxes make it harder for the smaller competition to Amazon, eBay, and other big sites to survive.

Both the taxes paid and where the taxes go should be based on where the seller is. To the extent that purchasers today pay local sales taxes on non-local purchases, this policy should be strengthened by making it so that sellers levy only their own local sales tax, not weakened by sending the sales tax to the purchaser’s location rather than the seller’s location.

This makes it easier for small businesses and mom-and-pop sellers to calculate sales taxes. They just have to know their own local sales tax and apply it. Under a destination-based sales tax, they have to know a lot more about their customer which in turn means the law has to be a lot more complicated. You can see it in the proposed rule changes.

(C) Sale consummated in any local taxing jurisdictions imposing less than 2.0% in total local taxes—local sales taxes and use taxes due. If a sale is consummated at a location in Texas where the total local sales tax rate imposed by the taxing jurisdictions in effect at that location does not equal 2.0% according to the provisions of subsection (c) of this section, and the item is shipped or delivered to the purchaser at a location in this state that is inside the boundaries of a different local taxing jurisdiction, additional local use tax may be due based on the location to which the order is shipped or delivered or at which the purchaser of the item takes possession, subject to the two percent cap. The seller is responsible for collecting any additional local use taxes due on the sale, regardless of the location of the seller in Texas. See subsection (i) of this section. If the seller fails to collect the additional local use taxes due, the purchaser is responsible for accruing such taxes and remitting them directly to the comptroller.

The way I’m reading that, this doesn’t apply just to online sales. If I drive to an antique store in Burnet, and ask them to ship the item I buy to my home instead of carrying it back myself, the antique store—which may not even have an online presence—is responsible for figuring out what the taxes would have been had they sold it to me in Round Rock.2

It’s possible that an online seller has it easier than that hypothetical antique dealer; as a “remote seller” they may be able to default to the “the single local use tax rate published in the Texas Register”. But they’ll have to wait up to fourteen months to start selling.

(i) Before using the single local use tax rate, a remote seller must notify the comptroller of its election using a form prescribed by the comptroller. A remote seller may also notify the comptroller of the election on its use tax permit application form. The remote seller must use the single local use tax rate for all of its sales of taxable items until the election is revoked as provided in clause (ii) of this subparagraph.

(ii) A remote seller may revoke its election by filing a form prescribed by the comptroller. If the comptroller receives the notice by October 1, the revocation will be effective January 1 of the following year. If the comptroller receives the notice after October 1, the revocation will be effective January 1 of the year after the following year. For example, a remote seller must notify the comptroller by October 1, 2020, for the revocation to be effective January 1, 2021. If the comptroller receives the revocation on November 1, 2020, the revocation will be effective January 1, 2022.

Good luck not breaking the law if you’re an individual making occasional sales online.

The single local use tax rate is currently 1.75%. Compared to the maximum of 2% that localities can add to the state sales tax, this means that low-tax locales don’t get much benefit for being low-tax. It’s not great for purchasers living in low-tax areas either; they’ll have to pay the higher tax or deal with a lot of paperwork to get their money back.

(G) Direct refund. A purchaser may request a refund based on local use taxes paid in a calendar year for the difference between the single local use tax rate paid by the purchaser and the amount the purchaser would have paid based on the combined tax rate for all applicable local use taxes. Notwithstanding the refund requirements under §3.325(a)(1) of this title (relating to Refunds and Payments Under Protest), a non-permitted purchaser may request a refund directly from the comptroller for the tax paid in the previous calendar year, no earlier than January 1 of the following calendar year within the statute of limitation under Tax Code, 111.104 (Refunds).

A destination-based sales tax is yet another burden on small businesses that makes it harder to compete against big businesses.

Source-based sales taxes also encourage lower tax rates by encouraging businesses to set up where taxes are low. This means that source-based sales taxes encourage localities to keep sales taxes low in order to attract businesses. This makes it the better policy both for sellers and for purchasers.

Source-based sales taxes should be the default on the federal level if sales taxes for online purchases are to be required on the federal level. The country should move to origin-sourced and origin-levied, rather than destination-sourced and destination-levied, for any interstate taxes that must be added to purchases. It would be a major boon to small businesses and individuals who just want to sell something online without having to hire lawyers a year before they make their first sale.

These days, small businesses and individuals need all the boon they can get. This is exactly the wrong time to make selling, online and off, more complicated.

The comment period, as far as I can tell, ends on April 3.

Comments on the proposal may be submitted to Teresa G. Bostick, Director, Tax Policy Division, P.O. Box 13528, Austin, Texas 78711-3528.

An email address for Teresa G. Bostick is in the Notice of Hearing (the deadline has been extended to April 3 since that notice). It may also be useful to leave comments on the Comptroller’s Facebook page.

In response to Punishing low-tax states: An Internet sales tax that looks at the customer’s state instead of the seller’s state punishes states with low sales taxes and inhibits competition.

  1. Had I known about it, I probably would not have suggested even the minimally complicated system I did for transferring taxes from the seller to the buyer’s locality. Sales taxes should be levied by the seller based on the seller’s location, and sent to whoever the seller would normally send them to, period. If states want to create a compact to share their taxes with other states, more power to them, but it should not be required.

  2. And if they don’t, I as the purchaser am supposed to realize that they didn’t and pay the sales taxes myself. This is supposed to be less confusing?

  1. <- National Review sales tax