The Holmes Page: The Soap Box 1997/08/27 - International Commerce and Taxes

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THE SOAP BOX 1997/08/27

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1997/08/27: International Commerce and Taxes Recently, the booksellers Barnes & Noble have been competing with Amazon.com, and part of their "strategy" is to throw law suites at each other because of apparent loopholes in the sales tax laws. Amazon believes that B&N should charge sales tax on Web transactions because it actually has a physical presence in most states. On the other hand, Amazon is "virtual" -- entirely Web-based -- so no sales taxes apply.
I often come across price lists which show a price and then say something like "New York residents please add X% sales tax". The sales tax applies to New York residents because the company is also located in New York. Sales tax is not applied to orders from outside of the state.
Governments around the world are looking very closely at the issue of taxing transactions on the Internet. There are many issues to consider.
Start with the seemingly simple question of whether the transaction should be taxed at the rate in the seller's region or the buyer's.
If the transaction is taxed at rate of the seller's region, the advantage is simplicity: the seller knows his local tax rate and can easily apply it to every sale. However, if the seller's tax rate is high, he may lose business as buyers look elsewhere for lower prices. This may cause sellers to move out of regions with high tax rates and locate "off shore" in lower tax regions. Thus, regions with high tax rates will get less revenue which will cause them to increase the tax rate further, causing a snowball effect. To counteract the outward migration of companies, regions will have to lower sales taxes to attract more businesses and generate more revenue. This will result in a "sales tax war" between regions where sales taxes are lowered until they reach zero. The regions would then be dependant on corporate taxes for revenue. Then, there would be a "corporate tax war"...
If transactions are taxed at the rate of the buyer's region, the advantage is a "level playing field" for the sellers because the buyer's tax rate would be applied to all sellers. But there would be more bookkeeping for the seller who has to know the tax rates of all of the regions where buyers are located. Also, to make more profit, sellers will want to sell to buyers located in regions with the highest sales tax rates, so regions with lower rates (which is good for buyers) will have to raise rates to attract business. This idea of a government penalizing its own people to attract outside revenue is something that Canadians live with every day -- the Canadian dollar is kept artificially low in relation to the U.S. dollar in order to entice foreign investors.
Perhaps the key question is which government should get the money generated from sales tax -- the seller's or the buyer's?
One possible "solution" would be to split the tax 50-50, where the rate applied to the sale would be the average of the seller's and the buyer's rates. The logic is that both parties are involved in the transaction, so both sales tax rates should apply. The issue of "knowing all of the sales tax rates of the world" can be solved by creating a global repository of sales tax rates that can be queried in order to determine the current rates of the two parties.
Certainly, there are international tax laws in place to handle "conventional" transactions, but complexities and administration costs (not to mention political upheaval) keep companies out of many regions. In most cases, it just isn't worth it.
But that is changing. The potential global market for products and services is huge compared to the regional markets.
Governments around the world are going to have to get together in order to stop "losing" money. Undoubtedly, the United States is going to get the upper hand in many decisions, like it has with GATT (General Agreement on Tariffs and Trade) and NAFTA (North American Free Trade Agreement) at the expense of Canada and Mexico. The U.S. has a protectionist attitude which is unnecessary in view of the fact that everyone wants to do business with them.
Ultimately, there will be a world-wide network run by a world-wide government where all financial, social, and informational activities take place. If history is any indication, there will be plenty of upheaval and disagreement about how it should be run!

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