Tuesday, November 24, 2009

How to legally tax the Internet by extending the Use Tax.

Background – The Unique Properties of the Internet

1. The Internet is a pervasive technology, which by its very nature, is both all encompassing and “borderless”.

2. The protocols of the Internet are designed to be fluid, transparent, and anonymous so that they may easy facilitate the transfer of information (including commercial transactions) between any connected end user (client).

3. The ability of any government to regulate the content or transactions over the Internet is practically impossible because of the inherent nature of the technology to mask or otherwise evade regulator surveillance.

4. The Internet however can be (and in some countries is) controlled through the regulation of ACCESS by Client (end users) and Internet Service Providers (ISPs) which represent the “terminal points” of any Internet Transmission - i.e., In order to access the Internet from within New Jersey, the typical end user would dial the local NJ access telephone number of their ISP. The fact that the end use may be accessing the ISP from a location, other that one physically within the State of New Jersey, using long distance, or other level of technology, is irrelevant.

Understanding: Sales and Use Tax

1. States commonly assess a transactional Use Tax based on specific sales (or rentals) which occur within their borders, without regarded to the location of the ultimate consumption of the purchased product or service. When this tax is assessed (and paid) at the Point of Sale, it is commonly known as a "Sales Tax” - something with which most people are familiar.

2. Purchasers are generally required to pay a Use Tax on purchase transactions occurring outside of its borders and then when the goods are repatriated into another State for ultimate consumption - i.e., a book purchased in Philadelphia or New York City, which is then brought back into and used (read) within New Jersey, would be subject to Use Tax; as verse a book purchased and used within New Jersey would have been assess a Sales Tax. The fact that such out of state transactions are virtually (until now) untraceable; has made such efforts impractical.

3. NEXUS – this is the legal term which is used to define if a business or person has a “taxable presents” within a State. Businesses determined to “have Nexus” to New Jersey are thereby required to collect appropriate Taxes and Fees; while business without New Jersey Nexus are exempt from these regulations and laws.

4. KEY POINT - Obviously, businesses which are physically domiciled in New Jersey (i.e., Local) are “competitively disadvantaged” when competing with out-of-state vendors who are not obligated to collect NJ Sales Tax (i.e. Internet Commerce or Catalog Sales). The State of Delaware publicly states that consumers should shop there in order to avoid the payment of any Sales Taxes - although they fail to discuss the consumer's obligation to pay their own State's Use Tax.

Understanding Internet Commerce:

1. Given that Internet Commerce occurs at an indeterminate location rather than a specific point of sale (i.e., the local grocery store), THIRD PARTY PAYMENT confirmation (i.e., Credit Cards ) is generally used to effect these transactions.

2. Credit Cards may only be issued by Banks (and other "Financial Institutions") which have registered with a State’s Department of Banking and are in compliance with a given State’s banking regulations. That the Bank does not actually have to have a “branch office” within a state or that the actual processing the Credit Card account takes place outside the given State is irrelevant once the Bank is “registered” to transact business by the Department of Banking.

3. Financial Institutions are most likely to register with a State Department of Banking, so that in the event that they (the Bank) need to enforce collection (against you the credit cardholder) they will have the "Legal Standing" to make their lien and collect any outstanding account balance. The process of registering gives the bank "NEXUS" within that State.

4. The Name, Address and Taxpayer Identification Number are all information which is already collected in the process of issuing a Credit Card.

5. Credit Card Issues apply their transaction against known vendors (or member). These Vendors are identified by the nature of the product or service which they provide and this information is readily accessible; as well as any Sales Tax collected.


Since Congress has forbidden any State from "Taxing the Internet", how could any State's "Sales and Use Tax" be legally extended and applied to the Internet?

SOLUTION: Expand the Existing New Jersey Sales and Use Tax Regulations as follows:

1. Require all Credit Card Issuers licensed by the Department of Banking to provide to the Department of the Treasury, Division of Revenue and also to each Credit Card holder: a summary of all Non New Jersey Credit Card purchases (see example) for an annual report of activity (i.e. 1/Oct through 30/Sept - so as not to interfere with year end tax processing). This summary shall be broken down by State, and Status of the Vendor. Given the amount of additional revenue this proposal would accrue to the State, the Treasury make wish to allow a “processing credit” (based on the number of cardholders) to each Credit Card Issuer, which would off-set their cost of compliance with this regulation.

2. The “out of State” purchases shall indicate the amount of USE TAX (currently 7%) which may have been previously assessed against all stated purchases with were consumed or brought into New Jersey. Some States have entered into a "reciprocity agreements" where in they agree to allow a credit from the Sales Tax assessed on Out-of-State purchases, to be netted against their own State's Sales Tax.

State APPLE $100 @ 5% Tax = $5.00
Home State $100 @ 7% Tax = $7.00
Home State USE TAX due = $2.00 (7.00 due less 5.00 paid to Reciprocal State)

Obviously items which are purchased and consumed out of state are already exempt (i.e., hotel room and meals consumed during a vacation within the State of Florida); whereas a book purchased in Philadelphia, Pennsylvania would be subject to USE TAX if the book was “used” in New Jersey.

3. The amount of qualifying purchases, less any adjustments, shall be include on the New Jersey State Income Tax Return Line Number 41.

Talking Points - This is a lot of $%%##@$^&; you can't do this - It's UNFAIR!

1. Sales and Use Taxation has been thoroughly documented and upheld by State and Federal Courts with respect to its constitutionality.

2. Expanding Use Taxation, as discussed above, would not be subject to the existing Federally imposed prohibitions with respect to Internet Taxation – this expansion would be assessing a Use Tax on the transaction, not on the internet. Making transactions with ALL VENDORS (regardless of physical location) subject to the same set of Sales and Use Taxes to not only "more fair" with respect to the unfair subsidy provided by a "Sales Tax Free State", but it also provides a competitive LEVEL PLAYING FIELD for all local New Jersey Merchants, who are key members of our society.

SUPPORT YOUR LOCAL (fill in the blank)

3. Will the Poor pay more? Generally, consumption taxes are most burdensome to citizens of lower economic status (i.e., poor). However, this proposed change should not be expected to impact with group, because they have little access to either Credit Cards or Internet purchases – as they tend to be “cash based” purchasers. It might also be argued that broadening the tax base is "more fair" and the additional tax revenues are used to support state services.

4. Consumers who wish to avoid the implementation of this proposed expansion of the New Jersey Sales Tax would be obliged to establish credit cards in another State; however it is unlikely that a Credit Card Issuer would permit “out of sale” billing, as this could impede their efforts to collect unpaid account balances and other delinquencies (see previous).

5. Vendors, who have previously registered with the Department of the Treasury, will indicate a New Jersey Billing address on the Credit Card transactions, and thus be exempt from double taxation – since any NJ Sales Tax previous assessed would be indicated on the report.

6. The issue of permitting a credit for “sales tax” already paid to another State at the time of purchase to be used to partially (or fully) offset the “to be assessed” NJ Use Tax Liability; is permitted ONLY if that State has sales tax reciprocity with New Jersey, as previously discussed.

MY PARTING SHOT: The Elephant in the room ...

Another potentially beneficial (if unintended) consequence of this legislation will be that Internet Gambling would now be subject to Sale Tax, thus providing both an additional source of revenue as well as indirectly supporting and expanding local New Jersey Gaming interests (i.e., Lottery Tickets, Bingo, and Atlantic City Casinos).

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