Sales Tax


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Sales Tax

A state or local-level tax on the retail sale of specified property or services. It is a percentage of the cost of such. Generally, the purchaser pays the tax but the seller collects it as an agent for the government. Various taxing jurisdictions allow exemptions for purchases of specified items, including certain foods, services, and manufacturing equipment. If the purchaser and seller are in different states, a use tax usually applies.

The vast majority of states impose sales taxes on their residents. The only exceptions are Alaska, Delaware, Montana, New Hampshire, and Oregon. Some states rely more heavily on sales taxes for a significant portion of revenue. Tennessee, for instance, does not impose an Income Tax, so it relies heavily on sales taxes. The combined state and local sales taxes average about 9.25 percent per sale. The state of Michigan imposes a six percent sales tax, which accounts for about 28 percent of the state's total revenue. In 2002, the state collected $6.5 billion in sales taxes.

States have faced a long struggle to collect sales and taxes from retailers that are based outside the state and have no contacts with the state seeking to collect taxes. This is particularly true of companies that sell goods through mail orders or on the Internet. Even if an out-of-state retailer is not required to pay sales taxes within a state, the purchaser is nevertheless required to pay the sales tax on goods and services purchased through the Internet or by mail order. However, states rarely collect these taxes from the purchasers. According to a study by researchers at the University of Tennessee, states and cities in the United States lost an estimated $13.3 billion in uncollected sales taxes in 2001.

The U.S. Supreme Court has addressed the issue of states requiring out-of-state retailers to pay sales taxes on several occasions. In Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 97 S. Ct. 1076, 51 L. Ed. 2d 326 (1977), the Court required a showing of a "substantial nexus" between a taxing state and the company providing goods and services before the taxing state can require the company to pay taxes. Without this substantial nexus, a state that taxes an outof-state retailer has violated the Commerce Clause of the U.S. Constitution.

Subsequently, the Court applied this test to a case involving a state's attempt to tax a mail order company. Quill Corp. v. North Dakota, 504 U.S. 298, 112 S. Ct. 1904, 119 L. Ed. 2d 91 (1992). In Quill Corp., the state of North Dakota sought a Declaratory Judgment that Quill Corporation, which had is main offices in Illinois, California, and Georgia, was required to pay taxes on sales with North Dakota customers. Quill had no outlets or any sales representatives in North Dakota, though it received $1 million of its annual $200 million in sales nationally from the state. The Court held that North Dakota could not tax Quill because Quill did not have a substantial nexus with the state.

In order to address the problems associated with the collection of sales taxes on the Internet, the National Governors Association drafted the Streamlined Sales and Use Tax Agreement, whereby states would agree to modify their sales and use tax laws to a more uniform structure. Thirty-one state representatives signed the agreement, though individual state legislatures would have to modify their tax statutes to conform. The agreement is designed to remove complications among the sales and use tax laws in the different states and to eliminate the potential for double taxation. Several commentators, however, have noted that such an arrangement could violate the Commerce Clause based on the decisions in Quill Corp., Brady, and similar cases.

Further readings

Abrahms, Doug, and Brian Tumulty. 2003. "Legislators Consider Internet Tax." Herald Dispatch. Available online at <www.herald-dispatch.com/2003/January/28/LNtop1.htm> (accessed August 10, 2003).

Chi, Keon S. 2000. Electronic Commerce: Revenue Implications for States. Lexington, Ky.: Council of State Governments.

Due, John Fitzgerald. 1994. Sales Taxation: State and Local Structure and Administration. 2d ed. Washington, D.C.: Urban Institute Press.

Murray, Matthew N., and William F. Fox, eds. 1997. The Sales Tax in the 21st Century. Westport, Conn.: Praeger.

Cross-references

Taxation.

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