Sleepless in Sedalia – Or Further Discussion of Online Sales Tax Issues

Online sales taxes are one of those things where the more you study it the more questions you have. It’s like absurdist architecture, or the Green Bay Packer’s coaching decisions. This is the second in a series of posts that asks some important questions about how an online sales tax would be implemented in Missouri, which is very likely to happen. The important thing is to have it done right, and not just take our current, awful sales tax system and expand it significantly.

Expanding the sales tax base to include all online goods should not be done in a manner that would entice cities to depend even more on sales taxation and make rates higher. As part of expanding the tax base, Missouri should reform the system. The pertinent question is how to determine the tax rate. Does the location of the seller, shipper, or buyer matter most? There are arguments for and against all three possibilities. For in-state sellers, it would be fairly simple to just use the seller’s sales tax rate. But many sellers would be out of state, so participating in a multi-state agreement would be a requirement (and I could support that).

Setting the rate by the location (or nexus) of the in-state shipper may, overall, be the easiest, except for the fact that all of the harmful incentives we have had with shopping centers (tax subsidies, high rates, etc.) would be transferred over to logistics centers—a trend we are already seeing. A city with a large logistics park would simply set a very high sales tax rate in that area to make non-residents pay for as much of the city’s services as possible. That would be repeating the mistakes we have made under the present system.

Determining the rate by the address of the buyer would be preferable for fiscal discipline (voters would be approving the taxes they have to pay, like property taxes), but without a simplification of the rate system that could make for complicated collections. Our many cities, numerous city sales tax options, and many special taxing districts would make it very hard to determine a precise tax rate for everyone. There need not be only one answer to these questions. A hybrid decision is possible, and perhaps necessary.

Would additional taxes from obscure special taxing districts also be collected as a part of this? Are they technically use taxes or sales taxes? If it is a use tax (as I think a basic reading of the rules says it would be), then the special taxing district taxes might not have to be collected. If it is a use tax, does the typical $2,000 resident exemption (Missourians only file a use tax return if they accumulate $2,000 in taxable purchases on items that use taxes apply to in a given year) still apply? If that exemption applies—and, again, a basic reading of the law says it should—how could a seller possibly know where you stand on the exemption as a buyer? Do you need to apply for a refund from the state at the end of the year? That could be an enormous amount of paperwork for all involved to properly account for that exemption. Would it be better to eliminate that exemption and lower the rate to account for that?

The various bills that have been introduced attempt to cover some of these questions, but major bills like these are likely to be heavily amended if they are passed, so I think these questions are still fair. And the Packers should have gone for that touchdown . . .