For years, there have been promises by both Republican and Democratic lawmakers to reform our tax code. I’m not sure if many of you recall that in 2010 there was a bi-partisan commission convened by President Obama, “Simpson Bowles” to draft a proposal on reforming our tax code. What happened? The Commission presented its report to Congress, but they refused to do anything.
As a citizen and tax practitioner I get very frustrated when our elected leaders fail to address an issue that an overwhelming majority of Americans agree needs fixing. It is my belief that one of the biggest obstacles getting in the way of meaningful tax reform is that too much emphasis is placed on rate reduction. The reason rate reduction strategies fail is because there are too many constituencies who have a vested interest in preserving certain tax breaks like charitable deductions that would have to be eliminated in order to pay for across the board rate cuts. Thus, we end up in the same place we started.
As an alternative, I suggest that Congress focus its efforts on ways to reduce the compliance burden. Most people would agree that not only is the tax code too complex, but there is an inordinate burden placed on small business in keeping up with the confusing array of filing requirements. Therefore, what we need to do is look for areas that would streamline and simplify tax compliance.
One such area is sales tax. Under current law, each state and locality assesses its own sales tax. Hence, each state and local jurisdiction not only determines its tax rate, but also determines which items are subject to tax and who must pay. For that matter, this type of system worked in an era where most transactions occurred in a “brick and mortar” retail store. However, today with the advent of e-commerce this type of system no longer works.
Many businesses today no longer sell exclusively to customers in their local geography. In fact, many small businesses sell to customers in all fifty states and internationally. For that reason, a growing number of state governments recognize that they are losing out on revenues from “out of state” sellers. you might wonder how a state can compel an “out of state” seller to file and remit taxes in a state where they do not have a physical presence? The fact of the matter is that many state legislatures are devising more aggressive ways of attributing “nexus”, a tangible connection to a state, through alternative means, such as selling through affiliate websites, use of drop shippers, sales agents, etc. Therefore, because Congress has failed to enact any legislation that would address interstate commerce in the context of competing in a global economy, each individual state has taken to the initiative to determine its own set of rules.
The result is that we have created a beast that is absolutely untenable for most businesses to possibly keep up with. At present there are over 50,000 different sales tax rates in effect across the U.S. How can we possibly force a business to keep up with this madness and still remain competitive on a global stage?
We need to devise a better system for sales tax collection. I propose that we create a centralized system where every seller has to register and remit tax. Second, we must establish a unified rate that is to be used across all fifty states. For some states that do not have a sales tax, it would mean a tax increase. And, for other states with a higher sales tax rate, it would mean a tax cut.
We have to create a level playing field where consumers aren’t necessarily purchasing an item from a seller only because of the fact that they do not charge any tax. The states can reach an agreement amongst themselves as to how the taxes ought to be allocated amongst themselves. Should they be allocated on a “destination basis”, meaning that the state where the end consumer resides, receives the tax dollars? Or, should it be on a “transaction basis”, meaning that the state where the seller is located, receives the taxes? Those are all fine points that our elected leaders can hash out through negotiation. Regardless, we have to create a better system, and what I have tried to do in this post is to lay out a general framework that brings some sense of sanity to a broken system.