Tag Archives: Sales tax

07.17.2011 | Amazon vs. California

According to the Seattle Times, in 1996, Amazon’s CEO, Jeff Bezos said, “You have to charge sales tax to customers who live in any state where you have a business presence. It made no sense for us to be in California or New York.” Amazon’s home? Seattle.

Bezos was referring to a 1992 Supreme Court decision that said states could not ask out-of-state retailers with no local physical presence to pay a sales tax. Consequently, Amazon pays sales taxes to Kansas and Kentucky, North Dakota, and Washington because it has stores or offices there. Amazon claims it has no physical presence in California.

Using a broader definition, California disagrees.

Because Amazon has relationships with in-state affiliates that direct business to it, California says that Amazon will owe local sales taxes. Amazon responded by eliminating those affiliate relationships. In addition, Amazon has petitioned California to schedule a June referendum. Once Amazon gets 500,000 signatures, voters can decide whether California can keep its e-commerce tax.

You can see that we have here a much bigger issue. Should e-retailers charge sales tax? Local retailers say Amazon has an unfair advantage. The state of California desperately needs more revenue. On the other hand, as a growth sector of the economy, should e-commerce receive favorable treatment? And, through local taxes, are states obstructing interstate commerce?

The Economic Lesson

Citing the U.S. Constitution’s Commerce Clause, in Quill Corp v. North Dakota, the U.S. Supreme Court sought to limit when states could tax out-of-state businesses. Here, you can see the Court’s decision.

An Economic Question: Referring to opportunity cost, agree or disagree with Amazon’s Los Angeles customers paying an 8.75% tax.

Posted by: adminEcon
Tags: Amazon, California, commerce clause, opportunity cost, Quill Corp v. North Dakota, Sales tax, state revenue
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05.18.2011 | An Optional Income Tax

What if you could decide whether to pay an income tax?

Boston University economist Laurence Kotlikoff has a plan that gives us a choice. His basic message, though, is that Congress had better start to think creatively because our current system is “dysfunctional.” With a new approach, we can create better incentives.

Hoping to prove that neither liberal nor conservative ideas will work, he starts by explaining why an income tax and a sales tax are similar. Both affect our purchasing power and purchasing decisions. One just happens beforehand because it limits what we can spend while the other is after because it makes purchases more expensive. You can read his 3 billion steak example (!) here.

He calls his plan the purple tax because it combines a red state philosophy (with revenue primarily coming from a sales tax instead of an income tax) and a blue state approach (dependence on an income tax for most revenue). Red + Blue = Purple. The purple tax plan lets people decide whether they want to pay a sales tax or a “wealth” tax. You can see the details here.

The Economic Lesson

Sometimes, when you look at something different, you can better judge something that is familiar. By considering the purple tax, you can see our current tax system as just an alternative approach.

The most typical tax approaches include revenue coming from individual income, corporate income, and the VAT. Smaller categories are estate taxes, capital gains, sales taxes, and tariffs.

An Economic Question: The proposal for the purple tax plan says that it will “help the economy save, grow, produce jobs, and deliver high wages.” After looking at a summary here or the plan here, decide whether you agree.

Posted by: adminEcon
Tags: incentive, income tax, purple tax plan, Sales tax, taxation
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04.18.2010 | A VAT For Pretzels?

The Senate just said “No” to a VAT. Disagreeing, Paul Volcker sort of said “Yes” when he observed that a VAT is “not as toxic an idea” as we once believed. Suddenly everyone seems to be talking about a VAT.

Here are some basic VAT facts:

1. What is it?

Most fundamentally, the VAT is a consumption tax, sort of a distant relative of the sales tax. Please think about a pretzel. A sales tax on a pretzel would be paid at the cash register. (Federal sales taxes now provide only 3% of federal tax revenue.)

The VAT, a value added tax, is also a consumption tax. If we levied a VAT, as with the sales tax, our pretzel would have a higher price. However, the consumer does not pay the entire tax at the cash register. Instead, at each production stage, the value that is added to the product is taxed.

With a 10% VAT, when $100 of wheat for pretzels leaves the farm, the flour maker who buys the wheat pays $100 for the wheat and a $10 tax. Then, when the pretzel factory buys the flour, it pays (very hypothetically) $1000 for the flour plus $100 VAT minus a credit for the taxes that were already paid. At each stage, the VAT is levied on buyers of the unfinished product; the consumer covers the final VAT payment. Piecemeal, through a sequence of tax forms, the federal government identifies and charges for “value added”.

2. Who uses the VAT?

Close to 100 countries generate revenue through a VAT. In France, for example, more revenue is raised through their VAT than through income taxes. I checked the OECD website and saw that VAT rates vary. Denmark: 25%; Spain: 16%; Thailand 7%.

But then I discovered that reality can be a lot more complex. In the U.K., for example, where food is tax free, they decided to exclude frozen yogurt that needs to be thawed. They faced similar dilemmas about children’s clothing, having to decide the whether small adult sizes are for children and even if flotation devices are clothing.

3. Why is a VAT desirable?

Many economists believe that a VAT can generate “a ton of revenue“. Also, as a consumption tax that elevates prices, a VAT can encourage saving.

4. What is wrong with a VAT?

It is regressive. That is why the UK VAT, for example, excludes food. Also, a VAT can be complex.

5. When was the VAT created?

The VAT was invented in 1954 by Maurice Laure, a French tax official.

You can see where all of this is heading. It’s complicated. The basic issue, though, is if we spend more, we need more revenue.

The Economic Life

In the U.S., the personal income tax generates 44% of all tax revenue while social insurance taxes account for 42%. Corporate income taxes are a distant third at 7%.

Posted by: adminEcon
Tags: deficit, federal budget, OECD, regressive taxation, Sales tax, VAT
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