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Sales Tax and the Internet

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Diane Kennedy

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If you have, or plan to have, an Internet based business that sells products, have you considered sales tax issues?

There is currently a movement underway to create a Streamlined Sales Tax (SST) system that would be nationwide. That means you'll have to collect sales tax no matter where the purchases lives, or where you live.

Megan Hughes (Megan H) posted a great article about that at www.TaxLoopholes.com.

Take a minute to go there and read it..and then i'll give you my two cents on what I think is REALLY going on.
 

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AroundTheWorld

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Are they proposing a sales tax even if the purchaser lives in a non-sales tax state, like Montana?

Is this a federal proposal?

The federal debt is so huge... we are going to see more and more of this over the coming decades, IMHO.
 

MJ DeMarco

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As a web operator, the administration of this is going to be a huge nuisance and administrative nightmare. Its bad enough to report sales taxes just to your own state, but to add 49 others is going to be a big headache. Also, to administrate from the federal level, you can add a few more layers of bureaucracy to our already bloated government.
 
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Diane Kennedy

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Aug 31, 2007
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Are they proposing a sales tax even if the purchaser lives in a non-sales tax state, like Montana?

Is this a federal proposal?

The federal debt is so huge... we are going to see more and more of this over the coming decades, IMHO.
This is a federal proposal. Part of the issue is states like Oregon and Montana that don't have any mechanism, or even a constitutional right, to collect sales tax. That will change with the federal mandate, once they have a majority of states ratifying it.
 

Bilgefisher

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I thought it was up to individual states to collect sales tax, and federal gov't couldn't push that.... I must be wrong.
 
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Diane Kennedy

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Aug 31, 2007
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As a web operator, the administration of this is going to be a huge nuisance and administrative nightmare. Its bad enough to report sales taxes just to your own state, but to add 49 others is going to be a big headache. Also, to administrate from the federal level, you can add a few more layers of bureaucracy to our already bloated government.
:iagree:


Now, my prediction. First, a little history. We know that tax revenue will fall off greatly as Boomers retire. The US government has to find a way to replace it.

One of the short term solutions has been the Roth retirement account. When you roll your tax-deferred account into a tax-free account, you pay tax on the roll. But, from then on the account makes money tax-free. That created a huge windfall in the Clinton budget and went a long way to balancing the budget. We're going to see the same thing happen in 2010 when US taxpayers can roll into Roth, for the first time ever, regardless of their income level. In the past, only people who made less than $100K could roll. I'm anticipating a huge tax windfall again for the government.

But, it's not found money. It's borrowing against the future. So, what will the government do in the future to raise revenue as their savvy investors and business owners have moved to tax free environments (through pre-emptive tax strategies)? I think the only solution is start taxing on consumerism....ie, a national sales tax.

I think SST is the beginning of that. It will be an administrative nightmare, but once it's done (and you can blame the Internet for it), it'll be easy to push in an extra 1 or 2% for "administration" at the national level...and then once there is a foot in the door, look out!

This might seem like just a US issue, but how will Internet sales internationally figure into this? Does this mean we can set up servers in the Bahamas and pay tax at their low tax rate? Lots of issues to consider. The US will get more aggressive in raising revenue.

My favorite book on the theories of "what's next" is "The Sovereign Individual". It's not an easy read, but fascinating.
 

kurtyordy

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Aug 28, 2007
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Article does not mention exemptions. Will this be blanket to all products, or like PA, having clothing and food exempt? I have a bit of a vested interest in this.

I am surprised the crooks in PA have not joined this yet.
 
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Diane Kennedy

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Aug 31, 2007
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I thought it was up to individual states to collect sales tax, and federal gov't couldn't push that.... I must be wrong.
You're absolutely right. That's the way it is today. HOWEVER there is a movement to change it - that's why they need so many states to ratify it. Internet sales are pushing it.

I am certain that it will pass, just not sure when.
 
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Diane Kennedy

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Article does not mention exemptions. Will this be blanket to all products, or like PA, having clothing and food exempt? I have a bit of a vested interest in this.

I am surprised the crooks in PA have not joined this yet.
That's one of the issues to work out. Different states have different exemptions and they're all going to have to work it out.
 

Bilgefisher

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my apologizes for posting a long article and anything having to do with politics, but I did come across this today in reading the constitution. Please look at the bolded section. While our founders could not have even possibly dreamed of the internet, doesn't this apply to intellectual and physical property exported across state lines?

Section. 9. The Migration or Importation of such Persons as any of the States now existing shall think proper to admit, shall not be prohibited by the Congress prior to the Year one thousand eight hundred and eight, but a Tax or duty may be imposed on such Importation, not exceeding ten dollars for each Person.
The Privilege of the Writ of Habeas Corpus shall not be suspended, unless when in Cases of Rebellion or Invasion the public Safety may require it.
No Bill of Attainder or ex post facto Law shall be passed.
No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or enumeration herein before directed to be taken.
No Tax or Duty shall be laid on Articles exported from any State.
No Preference shall be given by any Regulation of Commerce or Revenue to the Ports of one State over those of another; nor shall Vessels bound to, or from, one State, be obliged to enter, clear, or pay Duties in another.
No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law; and a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time.
No Title of Nobility shall be granted by the United States: And no Person holding any Office of Profit or Trust under them, shall, without the Consent of the Congress, accept of any present, Emolument, Office, or Title, of any kind whatever, from any King, Prince, or foreign State.
 
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Diane Kennedy

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Bilgefisher - First of all, you came across this while reading the Constitution? I'm impressed! It's an amazing document, isn't it?

I commented on my blog on this as well...

I am NOT a scholar on this by any means. I think though that the fact that so many states are needed to ratify this change means it must be something like a Constitutional Amendment. There are currently 27 Amendments, with the last one added in 1992. So there is precedent.

States, in general, are really hurting for revenue. I think this change is going to happen.
 

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Bilgefisher

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Bilgefisher - First of all, you came across this while reading the Constitution? I'm impressed! It's an amazing document, isn't it?

I commented on my blog on this as well...

I am NOT a scholar on this by any means. I think though that the fact that so many states are needed to ratify this change means it must be something like a Constitutional Amendment. There are currently 27 Amendments, with the last one added in 1992. So there is precedent.

States, in general, are really hurting for revenue. I think this change is going to happen.
Interesting point. I read Megan's blog, I'll check yours out as well on this. Thanks for the reply.
 

John

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Sep 18, 2007
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Take a look at the "fair tax." May be a little bait and switch?

I think Andrew has the right idea here. There are more and more members of congress and presidential candidates pushing for the Fair Tax. They sell it as completely eliminating the federal income tax and replacing it with a Federal national sales tax.

I think the problem with the Fair Tax is that it opens the door to a Federal sales tax. Once that door's been opened I'm scared to death that we're eventually going to end up with both a Federal sales tax AND a federal income tax.
 

Bilgefisher

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There are currently 27 Amendments, with the last one added in 1992. So there is precedent.

I am glad you read it as well. I'm surprised so few people do.

I really hope this doesn't happen. I know states need the sales tax, changing the constitution seems a high price to do it. Thats as far as all go on that lest it become political. Not my intention.

I read the something similar was tried for mail order catalogs back in the day, do you know anything about that? If this does happen, how high of a tax are we looking at?
 
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Diane Kennedy

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I think the problem with the Fair Tax is that it opens the door to a Federal sales tax. Once that door's been opened I'm scared to death that we're eventually going to end up with both a Federal sales tax AND a federal income tax.
I think it's inevitable. A lot of money moved into Roth accounts (and even more will move in 2010), so there has been a big chunk of money taken out of the tax system. (Again, robbing the future to pay for the present.) What happens as we feel that impact of that?

I posted about this somewhere else, but I think bears repeating. - Last year the head of the GAO (General Accounting Office) tried to start a national campaign to address the looming Medicare crisis. He's a total bean counter (and I'm one too, so I can say that) and so no one ever showed up at his press conferences, but he had solid actuarial science behind his numbers. There are only two options: (1) Immediately double Social Security tax or (2) cut all Social Security benefits by 2/3's. Neither happened, or are likely to happen until it's a crisis.

Where is the tax money going to come from? I think it'll have to be a consumer tax...ie, national sales tax. And, meanwhile the income tax isn't going to go away - so we'll end up with both.

Tax is drag on the economic system. So, more tax means less economic growth. What will that do to the US economy...and the rest of the world economy?

And, just so this doesn't sound like a "chicken little - the sky is falling" thread - what can we do to prepare and help others do to prepare?

Personally, I think the answer is the Internet as much as possible and changing jurisdictions offshore. The Supreme Court said they didn't want to work about the nexus of the "flow of electrons" but a national sales tax is going to force them to do so. For example, if you sold goods to primarily a US market, but your server was offshore and under offshore jurisdiction, I can't see how the US is going to be able to force you to collect sales tax. That's just one thought - anybody else?
 

andviv

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I think it's inevitable. ...

Where is the tax money going to come from? I think it'll have to be a consumer tax...ie, national sales tax. And, meanwhile the income tax isn't going to go away - so we'll end up with both.
Yes, I agree. This happened back from where I am from... there is a sales tax (16%) plus income tax above certain level of income (around $1200 a month if I recall correctly).

Your idea about an offshore company sounds great. Taking advantage of free trade treaties may be a great option. Telemarketers do it these days to circumvent the Do-Not-Call registry. Mexico and Canada are part of the NAFTA and that may be part of the answer. Sending packages back and forth should not be a big issue but now the conversation about which of those two countries is 'business friendlier" will be interesting.
 

Allthingznew

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So, if it's a potentially viable option to go offshore for internet, what if that company held real estate? Does that open up some viable options for relief from the heat that is getting turned up on real estate investors? Or does that just change the can of worms?
 
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Diane Kennedy

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Aug 31, 2007
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So, if it's a potentially viable option to go offshore for internet, what if that company held real estate? Does that open up some viable options for relief from the heat that is getting turned up on real estate investors? Or does that just change the can of worms?
Sorry, I'm not understanding exactly what you are asking.

Do you mean what if a person invests in real estate offshore? Or what if someone offshore invests in real estate in the US?

I think you have an interesting idea, just not quite sure what angle you're taking.
 

Allthingznew

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Offshore company investing in US real estate. I'm suggesting we may be able to find a different approach for the future and the way we set ourselves up to do business and/or invest in real estate.

Assume ABC Inc., an American owned company, is set up as you were mentioning above to do business in the US from outside the US to avoid sales tax. What if that same company owned real estate? Is ABC Inc. still subject to AMT at any point, for example?

If not, why couldn't a company be structured similarly to deal in real estate investing alone?

Or does this bring up other more costly issues for the corporation? Or are there loopholes to make it work?

I don't know if that is much clearer than mud, but I'm just thinking we, collectively, might find a new way to do things few of us might have found on our own. I'm sure there are obstacles to what I'm suggesting, but there may be loopholes too.
 

TaxGuy

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Any updates on this?

Especially with how much has changed since this thread first began and the fact that more and more states will be hurting for tax revenues, especially here in IL and good ol' "we'll pay our gov't workers in IOU's" CA.

Looks like there's opportunities for accountants to take advantage of, if only I knew one :smxB:
 

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