Weekly Roundup: Time to Declare Independence from Sales Tax?


While efforts to prevent further erosion of the sales tax base continue to fizzle, the VAT may offer the fireworks needed to revive state finances. The VAT certainly has been a mainstay in Europe, with the OECD having released this week a discussion draft of commentary on VAT neutrality. Perhaps now is the time to look toward Europe, not in terms of 18th century enlightenment, but in terms of 21st century VAT. 

State concerns with sales and use tax focus primarily on how to treat sales across state lines. Internet-companies stand as the fastest growing group of commercial vendors to advertise, sell, and ship interstate. When consumers buy products from an out-of-state vendor, they owe use tax to their state of residence.  Ultimately, however, the states are ill-equipped to collect the tax, and will want the seller to do the collection.  

But What About VAT?  

Perhaps a value-added tax (VAT) is the answer. Like sales and use tax, the VAT is a consumption tax, but is paid by the sellers, not the purchasers. Basically, the VAT requires businesses to pay tax on their sales, less the cost of goods and services bought.

Working up the supply chain, the value-added tax is ultimately charged exactly once on the final price of goods and services sold to consumers, according to Josh Barro at Bloomberg View. "If you buy a sweater for $50 and the VAT is 10 percent, the price includes $5 of tax. Unlike a retail sales tax, payments are made by all the companies that added value along the way." And in its current article, VAT of the Land, The Economistreports that the "VAT's ability to pump beaucoup cash into America's voided treasury is a feature, not a bug."  The same may be true for the states. 

With the legal payer changed from purchaser to provider, the risk of noncompliance diminishes. The incidence and actual level of the VAT and sales taxes do not have to change, merely the person required to pay. 

The disadvantage of the VAT is that it might require more unified tax rates. This might be politically impossible. By way of experience, the nationwide attempt to unify sales taxes, known as the Streamlined Sales Tax Project, has met with limited success.  And importantly, the limitations that the Commerce Clause and Due Process Clause would impose on a state’s power to tax have not been analyzed with respect to VAT. It may be that "economic nexus" with the taxing state (i.e., sales above a certain threshold would be a sufficient statutory basis for the imposition of the tax, even if the vendor had no physical presence in the state) would have to be the basis of the state VAT. Additionally, the net receipts base of those vendors doing business both within and outside the state would have to be apportioned on the basis of the ratio of the vendor’s in-state sales to its nationwide sales.  

Other Developments:  

Property Taxes: 

Pennsylvania Gov. Corbett signed into law Thursday a bill that will allow the city of Philadelphia to delay a controversial property-tax overhaul for a year without the risk of being flooded with costly appeals.  Philly.com.    

Oklahoma law excluding property financed with federally tax-exempt bonds from the charitable exemption “is unconstitutional to the extent it creates a burden” on a charity's entitlement to property tax exemption.  
AOF/Shadybrook Affordable Housing Corp. v. Yazel
,
Okla., No. 107508, 6/19/12 

By Deborah Swann
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