Living Economics

To Tax or not to Tax?
Sales tax is easier to avoid than income tax in the age of ecommerce.

Buy.com sells a photo scanner for $418. An identical scanner sells for $428 at Onvia.com. They charge the same for shipping and have identical return policies. Both are reputable online retailers.

Under normal circumstances, most buyers would buy from Buy.com. But if you live in Tennessee, you are more likely to buy the scanner from Onvia.com. Why?

Buy.com has a distribution depot at Millington, TN. It is obligated to collect sales tax on any items bought by residents of Tennessee. But Onvia.com is located outside Tennessee. It is not obligated to collect any sales tax on items bought by residents of Tennessee. Tennessee residents are supposed to voluntarily send in the sales tax to their local and state governments. But few do or know how to do it even if they are so inclined.

So the effective price of the photo scanner at Buy.com is $452 ($418*1.0825) vs. $428 at Onvia.com. No wonder you are more inclined to buy from Onvia.com. This is especially true if you work at a state institution that enjoys tax exemption for work-related purchases. You can, of course, ask for a sales tax refund from Buy.com. But it is a hassle and the refund may never come.

There is currently a moratorium on sales taxes collection for online purchases from out-of-state buyers in the U.S. because it is extremely costly for online vendors to implement the multifarious sales tax codes of the 50 state and thousands of local governments. The U. S. Congress is also concerned that mandating sales tax collection for online merchants may kill electronic commerce before it has time to develop. Indeed, even without sales tax, the cost advantage of online purchases of less expensive items is often more than offset by the shipping costs.

Economic applications:

The emergence of electronic commerce poses additional challenge to the soundness of sales taxes in general. It is always easier to avoid sales tax than to avoid income tax. And electronic commerce makes it even easier to do so. And sales tax is generally regressive by charging a higher percentage out of poor people's income than rich people's income because rich people are less likely to spend all of their income on consumption.

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