The George Washington University Law School
From the SelectedWorks of Timothy Li
May 12, 2013
Proposal for a National Sales Tax to Incentivize
the Collection of Remote Sales Tax
Timothy Li
Available at: http://works.bepress.com/timothy_li/3/
Timothy Li
Proposal for a National Sales Tax to Incentivize the Collection of Remote Sales Tax
Abstract
This Essay proposes that Congress adopt a national sales tax at one national rate for
interstate sales, but with a credit for each transaction in which an out-of-state vendor remits state
sales tax. For states without sales taxes, remote vendors can still choose the state rate of zero
percent. For states with sales taxes, the national rate should be set to exceed every state’s sales
tax rate. Vendors would no longer be able to avoid sales tax by moving overseas. The proposal
further provides numerous incentives for Congress to act now rather than delay, including a new
source of national revenue, increased market efficiency, and more equal treatment of final sales
in the United States of foreign-made goods that currently escape any consumption tax. Finally,
to avoid duplicate enforcement, state authorities should take primary enforcement responsibility
because they have the largest financial stake and the most expertise in sales tax issues.
Table of Contents
Introduction..................................................................................................................................... 1
I.
II.
III.
Remote Sales Tax ............................................................................................................... 2
A.
Consumption-Based Taxes ..................................................................................... 2
B.
Quill Corp. v. North Dakota ................................................................................... 4
Current Responses to Quill ................................................................................................. 6
A.
The 2013 Marketplace Fairness Bill ....................................................................... 6
B.
The Rise of State-by-State “Amazon Laws” .......................................................... 7
Proposed National Sales Tax with a Credit for Remitted State Sales Taxes ...................... 9
A.
The National Sales Tax Would Restore Sales Tax Revenues to the States ............ 9
B.
National Sales Tax Revenue Would Incentivize Congress to Act Now............... 11
C.
Enforcement Should Remain with the State Tax Authorities............................... 14
Conclusion .................................................................................................................................... 17
Timothy Li
Proposal for a National Sales Tax to Incentivize the Collection of Remote Sales Tax
Introduction
In 1995, Amazon.com (“Amazon”) consisted of no more than a few people working out
of a two-car garage.1 Amazon is now the world’s largest online retailer, selling “everything from
tubas and golf carts to dishwashers and diapers.”2 Amazon’s original sales focused on “hard
goods” such as “books, computers, and other electronics,” but now one can buy almost anything
online.3 One problem with online sales, however, is that they often constitute remote sales, or
sales to customers in a state by an out-of-state vendor, and remote sales are not subject to sales
tax (“remote sales tax”) because the out-of-state vendor has no in-state physical presence.4 In
Quill Corp. v. North Dakota, the Supreme Court held that even though an out-of-state vendor
selling goods into a state had sufficient “minimum contacts” with the state to meet due process,
the state could not require the vendor to collect sales tax because the vendor had no in-state
physical presence.5 Because of Quill, state governments cannot require out-of-state vendors who
lack an in-state physical presence to collect remote sales tax on Internet purchases.6
Yet the policy of requiring an in-state physical presence does not make sense in today’s
global economy. U.S. companies should not be placed at a competitive disadvantage because
they maintain a physical presence in-state. Foreign companies should not receive preferential
tax treatment because they lack a physical presence in-state. If anything, these vendors should
be treated equally to achieve horizontal equity. The sales tax is furthermore a consumption tax
that should not depend on the location of production. Unlike the corporate income tax, which
1
See Kayla Webley, A Brief History of Online Shopping, TIME (July 16, 2010), available at
http://www.time.com/time/business/article/0,8599,2004089,00.html.
2
Id.
3
Id.
4
Zelda Ferguson, Is the Tax Holiday over for Online Sales?, 63 TAX LAW. 1279, 1281–82 (2010).
5
Quill Corp. v. North Dakota, 504 U.S. 298, 312 (1992); see also U.S. CONST. art. I, § 8 cl. 3 (Commerce Clause);
U.S. CONST. amend. V, XIV (Due Process Clauses).
6
Quill Corp., 504 U.S. at 312.
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companies can transfer overseas based on how the companies allocate income, sales tax should
depend only on the location of sale rather than the location of the company’s physical presence.7
This Essay proposes a national sales tax at one national rate for interstate sales, but with a
credit for payment of state sales tax. Although a national sales tax is not new, previous proposals
argue only whether the national sales tax should replace the personal income tax.8 Instead, this
Essay proposes the national sales tax as an incentive for out-of-state vendors to collect alreadyexisting state sales tax. Vendors would remit tax to either the federal or state government. They
would not have the option of collecting no sales tax in a sales-tax state. For states without sales
taxes, vendors would still be able to choose the state rate of zero percent. The Essay consists of
three parts: Part I introduces remote sales tax, Part II analyzes problems with current proposals,
and Part III proposes a national sales tax to incentivize vendors to collect state sales tax.
I.
Remote Sales Tax
A.
Consumption-Based Taxes
The sales tax is a consumption-based tax that applies to final personal consumption.
Sales tax has many advantages, including a broad base with low rates.9 It achieves horizontal
equity because every consumer pays the same tax on the same item of consumption.10 In 2012, it
provided state governments with total revenues of more than $400 billion.11 Forty-five states
and the District of Columbia now impose general sales taxes; each state also imposes a use tax
7
See Michael J. Graetz & Rachael Doud, Technological Innovation, International Competition, and the Challenges
of International Income Taxation, 113 COLUM. L. REV. 347, 427–28 (2013).
8
See, e.g., Should the U.S. Institute a National Sales Tax (or Similar Taxes Such as the "Value-Added Tax" or "Fair
Tax") to Replace the Income Tax?, http://www.balancedpolitics.org/national_sales_tax.htm (last visited Apr. 19,
2013); see also Fair Tax Act of 2013, S.122, 113th Cong. (2013); H.R.25, 113th Cong. (2013) (same).
9
Broad-based taxes allow for lower rates because they apply across a wide tax base. See David Brunori, News
Analysis: A Practical Approach to Libertarian Tax Policy, 134 TAX NOTES 273 (Jan. 16, 2012) (“For hundreds of
years, public finance scholars have argued that a tax system with a broad base and low rates works best.”).
10
See Sijbren Cnossen, A Vat Primer for Lawyers, Economists, and Accountants, in THE VAT READER: WHAT A
FEDERAL CONSUMPTION TAX WOULD MEAN FOR AMERICA 29 (Tax Analysts, ed., 2011) [hereinafter THE VAT
READER] (“In this context, fairness simply means that all goods and services should be taxed alike.”).
11
See Government Revenue Details: Federal State Local for 2012,
http://www.usgovernmentrevenue.com/year_revenue_2012USbn_13bs1n_40#usgs302 (last visited Apr. 18, 2013).
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on state residents for the in-state consumption of goods for which residents have not paid sales
tax.12 Five states—New Hampshire, Oregon, Montana, Alaska, and Delaware (“NOMAD”)—do
not impose sales or use taxes.13 In addition, although Congress has the constitutional authority to
tax interstate sales, it has traditionally left sales tax as the exclusive domain of the states.14
Although sales tax meets horizontal equity, it does not achieve vertical equity because the
tax does not depend on a taxpayer’s ability to pay, but applies automatically to each sale of
goods. This vertical inequity makes the tax regressive because low-income taxpayers allocate
more disposable income to consuming goods.15 State governments alleviate the regressivity of
sales tax by providing exemptions for necessities, such as food items for home consumption, but
these exemptions are not progressive because high-income taxpayers also use the exemptions.16
Because the sales tax applies only to final personal consumption, it does not apply to
business inputs.17 Business inputs are distinct from personal consumption because companies
use business inputs to create finished products. Taxing business inputs incentivizes companies to
integrate vertically to avoid the tax.18 Taxing business inputs also increases the total tax paid by
the final consumer because intermediate taxes cascade onto the price of the final product.19
By comparison, the value added tax (“VAT”) does tax business inputs, but it provides
companies with a credit for previously paid taxes.20 More than 140 countries use the VAT,
12
Alan D. Viard, Use Tax Collection on Interstate Sales: The Need for Federal Legislation, 66 STATE TAX NOTES
657 (Nov. 26, 2012).
13
Professor David Brunori notes that these states can be remembered using the NOMAD acronym. See Alan D.
Viard, Goods Versus Services: A Call for Sales Tax Neutrality, 60 STATE TAX NOTES 511 (May 16, 2011).
14
Quill Corp. v. North Dakota, 504 U.S. 298, 318 (1992); Nat’l Bellas Hess, Inc. v. Illinois, 386 U.S. 753 (1967).
15
William G. Gale, Building a Better Tax System: Can a Consumption Tax Deliver the Goods?, 95 TNT 218-95
(Nov. 6, 1995). High-income taxpayers, by contrast, allocate more disposal income to tax-exempt services. See id.
16
Alan D. Viard, Should Groceries Be Exempt From Sales Tax?, 61 STATE TAX NOTES 241 (July 25, 2011).
17
See James Bickley, A Value-Added Tax Contrasted With a National Sales Tax, 2008 TNT 36-28 (Feb. 1, 2008).
18
See Gale, supra note 15 (“Such ‘cascading’ . . . creates artificial incentives for firms to vertically integrate.”).
19
See Martin A. Sullivan, Economic Analysis: Can States Swap Sales Taxes for Income Taxes, 138 TAX NOTES 789
(Feb. 18, 2013) (“Taxation of business-to-business sales either raises final consumer prices by a percentage above
the sales tax rate (because extra tax is layered into intermediate sales) or cuts profits.”).
20
See Alan Schenk, Prior U.S. Flirtations With VAT, in THE VAT READER, supra note 10, at 57.
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including every developed country outside the United States.21 Under the VAT, all companies
remit tax to the government equal to the company’s gross revenues times the VAT rate, but each
company receives a credit for VAT previously paid by suppliers.22 Because the VAT applies
only to the “value added” by each step in production, it avoids double taxation and applies only
once to the final cumulative value purchased by consumers.23 The VAT furthermore does not
apply to exported goods because it applies only to goods sold domestically.24
In sum, the sales tax is an important source of revenue for state governments. One
problem with the sales tax, however, is its implementation: sales tax revenue has not kept up
with increases in personal consumption.25 One reason for this problem is cross-border shopping
through Internet sales that avoid sales tax. Internet technology has transformed the traditional
consumption of goods into online versions, including electronic books, music, movies, and other
services. Thus, states that do not modernize their sales tax laws could lose substantial revenue.26
B.
Quill Corp. v. North Dakota
Efforts by states to modernize sales tax laws, however, have not been successful because
of interstate commerce law. Under the Commerce Clause of the U.S. Constitution,27 only
Congress has the power to regulate interstate commerce.28 In Complete Auto Transit, Inc. v.
Brady, for example, the Supreme Court held that a state government could only tax an activity if
that activity had a substantial nexus to the state.29 In Quill Corp. v. North Dakota, the Supreme
Court applied the substantial nexus analysis to remote sales taxes, holding that state governments
21
See Kathryn James, Exploring the Origins and Global Rise of VAT, in THE VAT READER, supra note 10, at 15.
See Ine Lejeune, The EU VAT Experience: What Are the Lessons?, in THE VAT READER, supra note 10, at 277.
23
See Bert Mesdom, VAT and Cross-Border Trade: Do Border Adjustments Make VAT a Fair Tax?, in THE VAT
READER, supra note 10, at 196–97.
24
See Lejeune, supra note 22, at 267.
25
See DAVID BRUNORI, STATE TAX POLICY: A POLITICAL PERSPECTIVE 69–70 (3d ed. 2011).
26
Some projections estimate that lost sales tax revenue in 2012 could be as high as $12.6 billion. See id.
27
U.S. CONST. art. I, § 8 cl. 3 (Commerce Clause).
28
Quill Corp. v. North Dakota, 504 U.S. 298, 318 (1992).
29
Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 278 (1977).
22
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could not require an out-of-state vendor to collect remote sales tax unless the vendor had a
substantial nexus with the state, i.e., an in-state physical presence.30 This result was the case
even after the state met the Due Process Clause of the Constitution31 because due process
concerns the “fundamental fairness of governmental activity,” whereas the Commerce Clause
concerns the “effects of state regulation on the national economy.”32 The Court found that
collecting sales tax imposed too much of a compliance burden on remote vendors who lacked an
in-state physical presence. The Court furthermore found that Congress was better qualified to
regulate remote sales tax and possessed the constitutional authority to do so.33 The Court thus
dismissed questions of fairness in favor of a consistent national scheme for remote sales tax.
Quill therefore completely bars states from requiring out-of-state vendors to collect
remote sales tax, which is important because the collection of use tax from individual consumers
is more difficult than the collection of sales tax from vendors. Even though state residents must
pay use tax for the in-state consumption of goods for which they have not paid sales tax,
consumers rarely comply with the use tax.34 California, for instance, recently estimated that only
1.4% of California residents paid use tax, based on its survey finding that sixty-four percent of
consumers did not know that they owed use tax on Internet purchases; the remaining thirty-six
percent did not pay use tax because “they pay too much tax already” or “disagree with the tax.”35
Even when states do attempt to collect the use tax, state authorities lack the necessary resources
to enforce the tax. That is why collecting use tax from individual consumers is difficult.
30
Quill Corp. v. North Dakota, 504 U.S. 298, 312 (1992).
U.S. CONST. amend. V, XIV (Due Process Clauses).
32
Quill Corp., 504 U.S. at 312.
33
Id. at 318. (“[T]he underlying issue is not only one that Congress may be better qualified to resolve, but also one
that Congress has the ultimate power to resolve. No matter how we evaluate the burdens that use taxes impose on
interstate commerce, Congress remains free to disagree with our conclusions.”).
34
See Viard, supra note 12, at 657.
35
John Buhl, California BOE Survey Shows Some Choose Not to Pay Use Taxes, 62 STATE TAX NOTES 141 (Oct.
17, 2011); Amy Hamilton, California Use Tax Compliance at 1.4 Percent, BOE Analysis Says, 60 STATE TAX
NOTES 463 (May 16, 2011).
31
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II.
Current Responses to Quill
In response to Quill, state governments created the Streamlined Sales Tax Governing
Board (“SSTGB”).36 SSTGB’s goal was to address the problem highlighted by the remote
vendor in Quill, i.e., the burden of collecting sales tax was too high for remote vendors.37 After
an eleven-year effort by forty-four states, the SSTGB developed the Streamlined Sales and Use
Tax Agreement (“SSUTA”).38 The SSUTA reduces the burden of collecting state sales taxes by
simplifying the administration, efficiency, and uniformity of sales tax; it also protects consumer
privacy.39 Twenty-four states have adopted the SSUTA, but many states with significant market
power refuse to conform—e.g., New York and California.40 Part IIA first discusses current
marketplace fairness bills based on the SSUTA and Part IIB discusses New York and California.
A.
The 2013 Marketplace Fairness Bill
Through the SSTGB, the states introduced several marketplace fairness bills in Congress
to provide the authority for states to collect remote sales tax, but prior to 2013, none of these bills
had significant support.41 One reason for the lack of support could be that the bills effectively
increased taxes on Congressional constituents without increasing Congressional spending power,
because the revenue collected goes to the state governments. Although the Marketplace Fairness
Act of 2013 (“2013 Bill”),42 a currently pending bill, enjoys more support than previous bills,43 it
36
See Streamlined Sales Tax Governing Board, Inc., About Us,
http://www.streamlinedsalestax.org/index.php?page=About-Us (last visited Apr. 19, 2013).
37
See id.
38
See id.
39
See id.
40
See Streamlined Sales Tax Governing Board, Inc., Streamlined State Status 10-01-12,
http://www.streamlinedsalestax.org/uploads/images/state%20map%2010_1_12.jpg (last visited Apr. 19, 2013).
41
See, e.g., Marketplace Fairness Act, S.1832, 112th Cong. (2011); H.R.3179, 112th Cong. (2011) (same).
42
See Marketplace Fairness Act of 2013, S.336, 113th Cong. (2013); H.R.684, 113th Cong. (2013) (same).
43
See Jennifer Carr, Limitations Provisions in the Marketplace Fairness Act, 67 STATE TAX NOTES 849 (Mar. 18,
2013); see also Who Supports the Marketplace Fairness Act?, MARKETPLACE FAIRNESS ACT COMPLIANCE,
http://www.marketplacefairness.org/support/ (last visited Apr. 18, 2013). Even Amazon supports the 2013 Bill,
suggesting that “Amazon Tax fatigue,” discussed in Part IIB, may be affecting Amazon. See Amazon Among
Retailers, Organizations Supporting New Marketplace Fairness Act, 2013 Tax Notes Today 32-39 (Feb. 13, 2013).
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is not clear whether this support is sufficient to convince Congress to act now rather than delay.44
Even though a version of the 2013 Bill passed the U.S. Senate on May 6, “passage--or even
consideration--is much less certain” in the U.S. House of Representatives.45
The 2013 Bill would grant to states the authority to require out-of-state vendors,
regardless of location, to collect sales tax as long as the applicable state simplifies its sales tax
law.46 Each state has two options to simplify its sales tax law: adopt the SSUTA or meet five
simplification mandates.47 These mandates are: (1) notifying retailers in advance of rate
changes, (2) designating a single state organization to handle administration, (3) establishing a
uniform sales tax base, (4) using destination sourcing, and (5) both providing free software for
managing sales tax compliance and not making retailers responsible for software errors.48
One reason that Congress could pass the 2013 Bill would be to head off state government
insolvency. In theory, if Congress authorizes states to collect sales tax from remote vendors, the
states could balance their budgets, reduce requests for federal aid, and benefit Congress. State
solvency alone, however, does not seem sufficient to convince Congress to pass the 2013 Bill,
because state governments could still be insolvent even with the ability to tax remote sales.49
B.
The Rise of State-by-State “Amazon Laws”
Another reason that the 2013 Bill may not pass Congress is that many states with market
power refuse to adopt SSUTA, instead developing their own strategies to address remote sales
44
See Bill Summary and Status for S.336, http://thomas.loc.gov/cgi-bin/bdquery/z?d113:s.00336: (last visited Apr.
21, 2013); Bill Summary and Status for H.R.684, http://thomas.loc.gov/cgi-bin/bdquery/z?d113:h.r.00684:.
45
See Marc Heller, Aaron Lorenzo & Richard Rubin, Internet Sales Tax Bill Passes Senate; Attention Shifts to
Skeptics in House, May 10, 2013, http://www.bna.com/internet-sales-tax-n17179873903/; Bill Summary and Status
for S.743, http://thomas.loc.gov/cgi-bin/bdquery/z?d113:s.00743: (engrossed [passed] in Senate).
46
See S.336; H.R.684.
47
The 2013 Bill includes an exemption for sellers with less than $1 million in remote sales. See S.336; H.R.684.
48
See S.336; H.R.684.
49
Remote sales taxes could help states increase revenues, but would still not preclude states from overspending.
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tax. In 2008, for instance, New York passed an affiliate nexus law, or “Amazon Law.”50 Under
the Amazon Law, New York treats Amazon affiliates as equivalent to salespersons.51 Amazon
affiliates are individuals or businesses that refer potential customers to Amazon or assist Amazon
in making sales to customers.52 The New York Amazon Law requires remote vendors to collect
and remit sales tax when “soliciting business through an independent contractor or other
representative if the seller enters into an agreement with a resident of this state under which the
resident, for a commission or other consideration, directly or indirectly refers potential
customers.”53 Although Amazon challenged the law, the New York Court of Appeals declined
to strike down the law because the practical effect of the law was to equate Amazon affiliates
with a substantial nexus in New York.54 Other states followed New York’s lead with mixed
results. California, for instance, passed an affiliate nexus law in July 2011.55 Amazon responded
by firing its California affiliates and spending $5.25 million on a proposed voter referendum.56
Even though Amazon eventually reached a deal with California,57 other states did not fare as
well. Illinois, for example, passed an Amazon Law, but the law was struck down by a trial court
in that state.58 After the law was struck down, Amazon did not rehire its Illinois affiliates.59
50
See 91 N.Y. TAX LAW § 1101(b)(8)(vi).
Gordon Yu, Formulation and Enforcement of ‘Amazon’ Taxes, 67 STATE TAX NOTES 321 (Feb. 4, 2013).
52
See 91 N.Y. TAX LAW § 1101(b)(8)(vi).
53
See id.
54
See Overstock.com v. Dep’t of Taxation & Finance, ---N.E.2d---, 2013 WL 1234823 (N.Y. Mar. 28, 2013)
(“Essentially, through these types of affiliation agreements, a vendor is deemed to have established an in-state sales
force. Viewed in this manner the statute plainly satisfies the substantial nexus requirement.”).
55
See CALIF. REVENUE & TAXATION CODE § 6203(c)(5)(C).
56
Amazon’s proposed referendum asked California voters to overturn California’s affiliate nexus tax. See Aaron
Glantz, Amazon Spends Millions to Fight Internet Sales Tax, N.Y. TIMES (Aug. 27, 2011),
http://www.nytimes.com/2011/08/28/us/28bcshort.html.
57
See Nick Eaton, Amazon's sales-tax showdown may dissolve soon, SEATTLEPI.COM (Sept. 1, 2011),
http://www.seattlepi.com/business/article/Amazon-s-sales-tax-showdown-may-dissolve-soon-2151248.php.
58
Frank Catalano, “Amazon tax” struck down in Illinois in boost for affiliates, GEEKWIRE (Apr. 26, 2012 12:28 pm)
http://www.geekwire.com/2012/amazon-tax-struck-illinois/.
59
See Thread: Newegg / Amazon Type Affiliate available in Illinois?, WWW.ABESTWEB.COM,
http://www.abestweb.com/forums/illinois-affiliate-tax-592/newegg-amazon-type-affiliate-available-illinois157213.html (last visited Apr. 18, 2013) (noting that Amazon has not rehired Illinois affiliates).
51
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Based on its website, Amazon now collects remote sales tax from customers in nine
states,60 which naturally raises questions of “Amazon Tax fatigue.” Although Amazon Tax
fatigue suggests that Amazon may soon begin collecting sales tax in every sales-tax state, one
2012 study reports that out of the twenty-two states that have demanded sales tax from Amazon,
Amazon agreed to remit the tax in only fifteen of them and terminated its in-state affiliates in the
remaining seven.61 Thus, this piecemeal state-by-state approach leaves many states without
remote sales tax revenue, particularly in states where Amazon has not built a physical presence
or states which lack market power over Amazon. One-on-one deals between vendors and
particular states, moreover, do not resolve the remote sales tax issue for other remote vendors.
III.
Proposed National Sales Tax with a Credit for Remitted State Sales Taxes
This Essay proposes a national sales tax at one national rate for all interstate sales, but
with a credit for each transaction in which an out-of-state vendor collects and remits state sales
tax. The proposal would be similar to a VAT, but with only two levels, federal and state. Outof-state vendors could choose to remit the tax at the national rate to the federal government or at
the state rate to the state government. Vendors would no longer be able to avoid the sales tax by
moving overseas. For states without sales taxes, vendors could still choose the state rate of zero
percent. Part III first addresses the impact of the national sales tax on current state sales taxes
before discussing policy incentives and enforcement issues concerning the proposal.
A.
The National Sales Tax Would Restore Sales Tax Revenues to the States
The proposed national sales tax meets the goals of sound tax policy already associated
with the sales tax and would restore to states the authority to collect sales tax. Even though the
60
The nine states are Arizona, California, Kansas, Kentucky, New York, North Dakota, Pennsylvania, Texas, and
Washington. See Amazon Sales Tax on Items Sold by Amazon.com, available at
http://www.amazon.com/gp/help/customer/display.html?nodeId=468512 (last visited Apr. 18, 2013).
61
See Yu, supra note 52, at 335 tbl.4.
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proposal does not address vertical equity, the proposal improves the horizontal equity of sales tax
by treating in-state and out-of-state vendors equally. Expanding the sales tax base to include outof-state vendors on an equal basis further creates a broader base and allows for lower rates.
One major argument against a national sales tax is that the sales tax has been traditionally
the exclusive domain of state governments. Although it is true that state governments could lose
potential revenue to the federal government if out-of-state vendors choose to remit tax at the
national rate, states never had that potential revenue because remote vendors lawfully refused to
collect remote sales tax. In addition, the Amazon Laws pose at best only a limited solution that
leaves many states without remote sales tax revenue.62 Congress has always had the authority,
moreover, to tax interstate commerce, and the Supreme Court has held that the states do not have
the power to compel vendors to collect remote sales tax, even if Congress does not act.63
Nevertheless, a few adjustments to the proposed national sales tax could mitigate the
impact of the national sales tax on the traditionally state domain. First, Congress should limit the
sales that qualify for the single national rate to only those made by out-of-state vendors who lack
an in-state physical presence. Not only would this qualification limit the application of the
national rate to vendors who are probably not already collecting sales tax at the state rates, but it
is also essential to ensure the constitutionality of the proposal under the Commerce Clause.64 By
limiting the national rate to only out-of-state vendors making in-state sales, Congress establishes
the necessary jurisdictional hook of interstate commerce to meet constitutional scrutiny.
62
See supra notes 60–61 and accompanying text.
See supra Part I.B. In 1997, Congress added even further confusion to the remote sales tax issue by passing the
Internet Tax Freedom Act (ITFA). See 47 U.S.C. § 151 (2006). The ITFA precludes state governments from
imposing new or discriminatory taxes on “Internet access.” Id. Internet access is the “service” that allows Internet
users to access content, information, email, or other services over the Internet. Id. The ITFA, however, does not
preclude states from requiring out-of-state vendors to collect already-existing sales tax. Id.
64
See U.S. CONST. art. I, § 8 cl. 3 (Commerce Clause).
63
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Second, the national rate should be automatically set to the highest rate charged by the
several states, thereby ensuring that the national rate would not undercut the state-established
rates. Furthermore, Congress could set the national rate to exceed the highest rates charged by
the several states to ensure that the former exceeds the corresponding state rate for every state.
By setting the national rate higher than all of the state rates, out-of-state vendors who currently
remit sales tax at the state rates would have little incentive to switch to the national rate. The
added costs imposed by the higher rate on the final price would encourage consumers to choose
vendors who are collecting tax at the state rates. These consumers would create a market-based
incentive for remote vendors to choose the state rate rather than the national rate.65
In sum, out-of-state vendors would have an incentive to collect and remit remote sales tax
to state governments to avoid paying the tax at the higher national rate to the federal government.
State governments would increase their revenues because more out-of-state vendors would
choose the lower state rates over the national rate. In the case where an out-of-state vendor
decides to remit the tax at the national rate, the federal government would increase its revenues.
B.
National Sales Tax Revenue Would Incentivize Congress to Act Now
The proposed national sales tax also has numerous policy incentives that do not exist
under the current 2013 Bill before Congress. First, potential accretions to federal revenue under
the national sales tax would provide a strong incentive for Congress to pass the proposal because
it could result in increased federal tax revenues from companies who choose the national rate.
These companies could include, for example, foreign mail order catalogs or Internet companies
that take advantage of the U.S. market, but do not have an in-state physical presence. Although
it is unclear how much national revenue this proposal would generate, this incentive is still
important to encourage Congress to act now rather than to continue delaying.
65
The proposed tax primarily seeks to collect remote sales tax for the states rather than for the federal government.
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Congress could further add this proposal to the next “budget crisis” or “fiscal cliff”
resolution, because it provides for possible increased federal revenues without increasing the
rates of the more visible personal income tax. Like previous marketplace fairness bills before
Congress, the proposed national sales tax would not increase taxes, but would simply encourage
vendors to collect already-existing sales tax at the state rates. Consumers who disagree with the
national sales tax would still be able to choose vendors selling goods under the state sales tax.
Second, the proposed bill allows the marketplace to determine the true administrative or
compliance cost of collecting the state sales taxes in each state or local jurisdiction, rather than
relying on a judicially crafted solution under Quill that does not reflect the actual costs. Out-ofstate vendors who believe that the compliance costs are too high could simply choose to remit
the tax at the national rate to the federal government. No exemptions for necessities are
necessary, moreover, under the national sales tax because any out-of-state vendors who seek the
competitive advantage provided by sales tax exemptions should choose the state rates.
Third, the government could improve the horizontal equity of sales tax by compelling
out-of-state vendors to collect sales tax for all U.S. sales. An equity problem exists when the
government creates an incentive for U.S. companies to eliminate any U.S. physical presence,
move their jobs and factories overseas, and sell the same products over the Internet into the
United States at a competitive advantage. Even under Quill, these companies are still purposely
availing themselves of the U.S. market and should compete on an equal playing field with U.S.based companies. The proposed national sales tax would still allow out-of-state vendors to
choose between collecting the tax at the national or state rates, but the vendors would not be able
to undercut U.S.-based companies by collecting no sales tax in a sales-tax state.
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The sales tax is furthermore a consumption tax that should not depend on the location of
production. Unlike the corporate income tax, which companies could justifiably transfer
overseas based on how the companies allocate income, the sales tax should depend on the
location of sale rather than the location of the company’s physical presence.66 A U.S. company
should not be at a competitive disadvantage because it maintains a physical presence and
stimulates the local economy with that presence. Similarly, a foreign company or manufacturer
should not be at a competitive advantage because they have no physical presence or impact on
the local economy. If anything, both of these vendors should compete on an equal playing field.
The national sales tax would also achieve comity with the U.S.’s international trading
partners who use a VAT, because these partners impose VAT on U.S.-produced goods sold
within their countries, but do not impose VAT on goods produced within their countries and sold
in the United States.67 Similarly, the United States should require foreign vendors to collect
sales tax on sales made in the United States, because final consumption in the United States
includes foreign-made goods as much as domestic-made goods. Just as with the VAT, it should
not matter where the goods were created or manufactured.68 The sales tax should fall on final
consumption, and the delivery of goods should be taxable based on the location of the customer.
Moreover, even though strong counterarguments exist against a national sales tax, most
of these arguments concern whether a national sales tax or a VAT could completely replace the
66
See Graetz & Doud, supra note 7, at 427–28 (“The current U.S. corporate income tax rate of 35% is the highest in
the OECD, and that does not serve the country well—the greater the difference between the U.S. and foreign
corporate tax rates, the greater the incentives for shifting income abroad.”).
67
See Cnossen, supra note 10, at 23 (“[The Vat] is uniquely equipped to tax imports on par with domestically
produced goods and services and to free exports from tax.”).
68
See Graetz & Doud, supra note 7, at 427 (“Basing the U.S. tax on the amount of U.S. sales of goods and services
also resembles the destination-based allocation of revenues typical of consumption taxes, such as the value-added
taxes (‘VATs’) used in all OECD countries except the United States, and around the world. Such consumption taxes
are imposed in the country where consumption occurs, not where production takes place.”).
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personal income tax.69 These arguments include, for example, that a national sales tax would:
(1) be regressive, risky, and have high transition costs; (2) eliminate social security, tax
incentives (e.g., donating to charity), and jobs for tax attorneys and accountants; (3) increase
prices, discourage consumer spending, increase consumer debt, decrease the value of real estate
by eliminating tax advantages to owning property, and increase tax evasion since black market
purchases could avoid the tax; and (4) hurt retirees who have already paid income tax.70 Other
than the issue of regressivity, which this Essay acknowledges in Part IIIA, these arguments
assume the sales tax would replace the personal income tax. This Essay does not propose the
national sales tax as a replacement for the personal income tax, but as an incentive for remote
vendors to collect state sales tax. Because the proposal gives companies the option of choosing
the national rate or the state rate, it closes a loophole rather than overhauls the tax code; it would
not change the tax liability of most companies that already collect state sales tax.
In short, the proposed national sales tax has numerous policy incentives to encourage
Congress to act now rather than to delay. These incentives include a new source of national
revenue that could assist with fiscal cliff negotiations, increased market efficiency, and more
equal treatment of final sales to consumers in the United States, including foreign-made goods
that currently escape consumption taxes because the United States does not tax remote sales.
C.
Enforcement Should Remain with the State Tax Authorities
Once Congress passes the proposed national sales tax, moreover, national tax authorities
should defer to state authorities for enforcement of the national and state sales taxes. Placing
collection and enforcement authority primarily with the state authorities makes the most sense
69
See, e.g., NRF Asks House to Reject VAT and National Retail Sales Tax, 2011 TNT 144-36 (July 26, 2011) ; see
also Fair Tax Act, S.122, 113th Cong. (2013) (national sales tax bill); H.R.25, 113th Cong. (2013) (same).
70
See, e.g., Should the U.S. Institute a National Sales Tax (or Similar Taxes Such as the "Value-Added Tax" or "Fair
Tax") to Replace the Income Tax?, supra note 8.
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because the state governments have the largest financial stake in the sales tax. State authorities
have the most expertise concerning their state sales tax law; they also have previous experience
from other enforcement actions concerning their law. Keeping enforcement primarily with the
state authorities would further avoid duplicate enforcement by the national and state authorities.
One model for sharing enforcement between national and state tax authorities is the
agreement between these authorities concerning the auditing of federal and state personal income
tax returns.71 Under the agreement, the national authorities take primary responsibility for the
audits of tax returns and notify the state authorities when a taxpayer’s taxable income in that
state has increased. Here, the result would be very similar, but with the state authorities taking
primary responsibility for the audits. The national authorities would then share with the state
authorities any tax returns filed by remote vendors with the national authorities.72
The state authorities should also share with the national authorities whenever vendors
choose to remit the national tax rather than the state tax. As discussed above, qualifying out-ofstate vendors could raise a complete defense against state tax liability by demonstrating payment
of the national tax. Out-of-state vendors, however, would most likely choose to remit the tax at
the state rate because the national rate would lead to higher prices for their final products. These
vendors would have no liability for failure to remit the national tax after they pay the state tax.
Finally, to avoid jurisdictional conflicts among different state tax authorities, enforcement
should be based on the customer’s state of residence. Although in most cases the customer’s
state of residence would not be in dispute, customers could cross-border shop for digital goods
across different states. Traditionally, an out-of-state vendor could determine a customer’s state
71
See, e.g., FREDERICK DAILY, STAND UP TO THE IRS 318 (2009) (“States seldom audit individual taxpayers.”).
Sharing tax data should not be difficult because the national and state tax authorities already share employment
tax data. See e.g., Press Release, IRS and States to Share Employment Tax Examination Results (Nov. 6, 2007),
available at http://www.irs.gov/uac/IRS-and-States-to-Share-Employment-Tax-Examination-Results.
72
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of residence by using the customer’s shipping address, but that method may not work for digital
goods, such as eBooks, iTunes songs, or Apps directly delivered to handheld devices. Using a
customer’s billing address could also present the same problem because customers could set up
phantom billing addresses in sales-tax-free NOMAD states. Hand-held devices such as iPhones,
iPads, Kindles, and Android devices mark a dramatic change in the online consumption of goods
because customers can purchase and receive digital goods from remote vendors directly to their
devices regardless of their billing or shipping address. Cross-border shopping could thus occur if
a customer uses separate billing and shipping addresses from his actual state of residence.
To address cross-border shopping, state governments could use income tax addresses to
determine a customer’s correct state of residence. Income tax addresses should be more accurate
because state residents already report income tax addresses on federal and state income tax
returns under penalty of perjury.73 Customers can also save addresses with remote vendors,
which could reduce the inconvenience of requiring an income tax address for remote sales.
In sum, the proposed national sales tax would provide remote vendors with an incentive
to collect and remit state sales taxes to avoid paying the higher national rate. State governments
would increase their revenues because more remote vendors would remit remote sales tax to the
state. In the case where a remote vendor decides to remit the tax at the national rate, the federal
government would increase its revenues. The proposal encourages Congress to act now rather
than delay, by providing for a new source of national revenue, increased market efficiency, and
more equal treatment of all final sales to U.S. consumers, including foreign-made goods.
Finally, enforcement should remain with the state authorities to avoid duplicate enforcement.
73
See, e.g., IRS Specific Instructions: Line 10. Penalties of Perjury Statements and Attachments, available at
http://www.irs.gov/instructions/i8802/ch02.html#d0e1016 (last visited Apr. 19, 2013).
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Conclusion
This Essay proposes that Congress adopt a national sales tax at one national rate for
interstate sales, but with a credit for each transaction in which an out-of-state vendor remits state
sales tax. For states without sales taxes, remote vendors can still choose the state rate of zero
percent. For states with sales taxes, the national rate should be set to exceed every state’s sales
tax rate. Vendors would no longer be able to avoid sales tax by moving overseas. The proposal
further provides numerous incentives for Congress to act now rather than delay, including a new
source of national revenue, increased market efficiency, and more equal treatment of final sales
in the United States of foreign-made goods that currently escape any consumption tax. Finally,
to avoid duplicate enforcement, state authorities should take primary enforcement responsibility
because they have the largest financial stake and the most expertise in sales tax issues.
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