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Re: Can someone explain how sales tax works in the US.
Stanley A. Klein
Re: Can someone explain how sales tax works in the US.
Tue, 29 Oct 2002 19:01:44
Some of what you say here is a bit of a rant, and I don't agree with parts
of it. For example I disagree that city and county boundaries are
gerrymandered. Perhaps in rare occasions, but I think counties were
generally sized so someone could get to the county seat, conduct business
there, and get back home in the same day on horseback. County boundaries
are usually some natural feature such as a river. The boundary of
Montgomery County was set in the late 1700's. Cities are established by
incorporation and usually grow by annexation, which in Maryland requires
that the affected property owners petition the city to be brought in. A
property owner can usually only be forced into a city here if not doing so
would create an enclave (an island of property surrounded by the city).
On the issue of common definitions in local taxation (particularly sales
taxes) this is an issue that has been around for many years but only became
important because of the Internet. Most sales taxes are accompanied by
"use" taxes, i.e., if you buy something out-of-state and bring it into the
state to use, you are supposed to submit a return and pay tax at the same
rate as the sales tax. Generally it gets to be a big issue when the item
is something like furniture or expensive equipment.
Forty or fifty years ago, this only applied to small, mail-order companies
that sold niche products by catalog or magazine advertisement. Sears,
Wards, and Penneys sold by catalogs, but also had brick-and-mortar
presence, so they collected the sales tax on each order. At some point the
Supreme Court decided that there had to be a nexus (e.g., a physical
presence) to require the seller to collect the tax, and that's where things
stood until the Internet came along.
The Internet and e-commerce have created what is essentially an enormous
number of catalog merchants. States and localities have begun to notice
the drop in sales-tax revenue from their brick-and-mortar merchants, and
have also begun to notice the unfairness of treating out-of-state catalog
merchants preferentially over their local brick-and-mortar merchants. They
have begun to raise issues in the courts and Congress about requiring the
out-of-state merchants to collect the taxes they have had on their books
for many years.
A few years ago, we discussed this issue in the IEEE-USA Committee on
Communications and Information Policy. At that time I suggested that it
should be possible to create a simplified collection of data that could be
used by catalog merchants for collecting state sales/use taxes. It would
be developed by looking at all the variations and identifying a reasonably
small set of parameters that could describe the rates and taxability
conditions. Each state would be able to establish a small number of (not
necessarily contiguous) districts that would share the same parameters.
This could reduce the number of variations to perhaps a few hundred, which
is manageable for computing purposes. If a state wanted to participate and
have its use taxes collected, it would have to modify its sales/use tax
structure to comply with the standard.
At the time I made the suggestion, I was told that there was a proposal
similar to what I had described either being discussed by some kind of
commission or being proposed for consideration by some official body. I
haven't heard anything about it since, but it would be reasonable to expect
something along those lines to be brought up again, given that many states
are in bad fiscal shape right now, and most states and localities are
required to have balanced operating budgets. (They can usually borrow only
for their capital budgets and often need to have their bonds approved by
BTW, I think you could get a lot of expertise together if each state
comptroller sent a senior staff member to a meeting. Congress would need
to be involved because of the interstate commerce aspects, but sales tax
details are a state issue and it's the states that would have to compromise
out their individual ideosyncrasies to get a usable standard.
At 09:54 AM 10/28/2002 -0800, Todd Boyle wrote:
>Thank you Stanley, for excellent summary of the situation.
>In conclusion, automation of sales taxes are now held up by at least
>two fundamental problems. One, is that state and local political districts
>are gerrymandered for political circumstances and even if they were not
>constantly changing, the applicable geo. areas for taxes do not
>correspond with any geographic classifications already established
>such as zipcodes, telephone area codes, or neat latitude/longitude shapes.
>So, automation of the location aspect of taxability will require very big
>geographical/mapping technology, i.e. expensvie and commercial, for a
>long time. There is already a competitive industry of web services that
>return some tax information by address or zipcode for example.
>Another problem is lack of any standardization of the semantics for
>naming or describing a tax or its tax rate, the bases of what is taxable
>and the bases and units of measure used for taxation (by the gallon,
>by value, etc.) We don't even have a naming standard or classification
>scheme for the naming of state and local taxes in the US.
>And 100% of the expertise necessary for creation of such semantic
>standards is employed by commercial vendors who sell solutions in
>this market. And our congressmen and women? There are a few
>who would like to make taxation more efficient and automated :-) and
>they are *totally* overwhelmed by anti-tax components in state as well
>as federal government. Since the government has grown like a cancer,
>to control over half the GNP, these assorted republicans and conservatives
>imagine that by blocking funding for the IRS or anything associated
>with automation of transaction systems, they might someday reduce
>the power of the state. sigh. Instead all they achieve is concentration
>of power in financial services corporations and software companies,
>and wasting the time of millions of workers in the economy...
>If anybody is interested in working towards standardization of naming
>and semantics of state/local taxes, classification schemes for state/local
>taxes, or automation of geographic classification, I would be interested
>in talking with you.
>Todd Boyle CPA 9745-128th Ave NE Kirkland WA
>International Accounting Services, LLC www.gldialtone.com
>425-827-3107 AR/AP everywhere www.arapxml.net
>Financial architect - www.escapia.com
>At 12:58 AM 10/28/2002, Stanley A. Klein wrote:
>>The bad news regarding sales taxes is that rates are not the only
>>consideration. There is also the issue of what is taxable. For example,
>>in Maryland food and medicine (even over-the-counter medications, including
>>things like cough drops) are not taxable. However, restaurant meals,
>>carryout, and some snack foods are taxable. Services, such as automobile
>>repair, aren't taxable, unless that was changed in a recent session of the
>>Legislature (I think it was proposed). In Virginia, food and medicine are
>>taxable (although there has been debate over the years about making them
>>non-taxable). A few years ago, Maryland had a one-time "sales tax holiday"
>>on clothing and school supplies the month before school started. What is
>>taxable can change any time the Legislature meets. I think some
>>jurisdictions levy different rates on different kinds of items. For
>>example, I think that in DC the tax rate on restaurant meals is higher than
>>the tax rate on ordinary goods.
>>The good news regarding sales taxes is that an enterprise does not need to
>>collect sales taxes unless there is a legal "nexus" between the enterprise
>>and the state. I think that means the enterprise has to have a
>>bricks-and-mortar presence in the state.
>>There are also other kinds of taxes -- called excise taxes -- that act
>>somewhat like sales taxes. For example, taxes on liquor (which are usually
>>on a statewide basis) are excise taxes, not sales taxes. When you buy
>>liquor in Maryland, there is an excise tax built into the price and you pay
>>sales tax on top of that. Maryland allows local jurisdictions to levy an
>>entertainment tax, a hotel tax, a tax on telephone services, and other
>>taxes (in addition to property taxes on real estate and business equipment,
>>which -- together with locally levied or shared income taxes and user fees
>>-- are the major sources of revenue to local jurisdictions). If you want
>>to see an example of local revenue sources, I think Rockville's budget is
>>posted at www.ci.rockville.md.us.
>>Zip code doesn't mean much regarding taxes, other than statewide sales
>>taxes. For example, Rockville -- which is an incorporated municipality --
>>has (or had) an entertainment tax (mostly, IIRC, on movie theater
>>admissions). The zip code in which I live (20852) is partly in Rockville
>>and partly only in Montgomery County. Those of us who live in the City of
>>Rockville sometimes call the other part of 20852 (and other zip codes fully
>>or partly outside the city but served by the Rockville Post Office) "post
>>office Rockville." The people who live in the other part of 20852 actually
>>have the option of calling it "North Bethesda."
>>Rockville has a Mayor and Council and many municipal services. We also get
>>services from Montgomery County. The tax structure that supports those
>>services is somewhat complicated when you look into the details. A
>>business in this area would need to deal on a local basis with sales (and
>>possibly excise) taxes, personal property taxes on real estate and business
>>equipment, and employee income tax withholding. BTW, I have to keep "fixed
>>assets" property records to fill out my business personal property tax
>>return. The assessment of the property value is done by the state, but the
>>taxes are levied locally. I get a bill that combines my Rockville and
>>Montgomery County taxes.
>>Both the City and County have some special taxing districts that usually
>>affect the property tax rate. For example, businesses in Rockville's Town
>>Center area pay a special property tax to the City to support building of a
>>Town Center parking garage.
>>I don't have any employees, but if I did I would have to deal with state
>>and Federal income tax withholding. In Maryland every county can levy a
>>"piggyback" income tax that is calculated on the state income tax form.
>>The withholding rate is essentially differnt for each county. In some
>>states a municipality can also levy a local income tax.
>>At 06:42 AM 10/28/2002 -0500, Lawrence <address@hidden> wrote:
>> >A general sales tax solution in US is a very complicated thing. Best to
>> >have it configurable.
>> >In the US there are 9 home rule states. California, Colorado are two,
>> >the others I can not remember. Home rule states can levy taxes by what
>> >every geographic area suits their ends -- usually by county. For
>> >example, if district (a tribe of individuals) decides they would like
>> >to build a library, they could mandate that merchants, telephone
>> >companies and whoever is in their defined geograhic area, pay a special
>> >"building library tax."
>> >There are clever US individuals who have discovered that taxes are based
>> >on zipcodes and have moved their postoffice boxes to a lesser taxed
>> >area. These noncomforming individuals are probematic.
>> >This information may be quite dated as I have not looked into this for a
>>Gnue mailing list