Proposals for a national sales tax system have been debated for years as a potential simplification of complicated tax compliance requirements across various jurisdictions. However, implementing a true national sales tax raises many challenges that advocates of the approach often overlook. From setting a single rate that accounts for diverse regional economies to ensuring the tax burden is not disproportionately heavy on lower-income individuals, establishing a workable national sales tax model poses numerous complex issues. This blog will explore some of the complexities involved in administering a national sales tax system and whether it could realistically achieve the goal of simplified tax compliance.
In order to have the revenue needed to provide basic services and support the government, legislatures at every level have to impose taxes. Basically, there are three kinds of taxes in the United States:
- income tax
- property tax
- sales tax
Every state, city, and county — as well as the nation as a whole — has some mix of these taxes. Every now and then, there’s a movement to get rid of or at least several limits one of them in favor of another. Right now, we’re hearing quite a bit of talk about how it would be best to eliminate personal income taxes or severely reduce property taxes and go instead with a national sales tax.
This may be especially appealing now that Wayfair allows states to require sales tax compliance from remote sellers. Instead of charging sales tax only for companies with physical nexus in their jurisdictions, states can set conditions of economic nexus, claiming that selling something to a resident of a state automatically incurs nexus.
Challenges to the specific ways these laws are being handled have been bouncing through courtrooms across the nation, and Congress has heard arguments that the new system is so complicated that it creates a burden for small and medium-sized businesses.
So a national sales tax might be just the ticket. It could simplify the process and move the greater burden into taxes on consumption, over which you could argue everyone has equal control, rather than focusing on income or property, which are not as evenly divided.
The simplicity of sales tax?
The claim that sales tax would be simple is based on the idea of a national sales tax. Everyone buying anything would pay 10% or 23% or some other fraction in addition to the cost of the item.
Right now, some people pay sales tax in some situations and others do not.
Some items are taxable under some situations and some are not. Often sales taxes begin with a general mandate and then industries lobby for exemptions for their particular items, ending up with very complex distinctions.
Take marshmallows, for example. Marshmallows are taxable in some jurisdictions because they are food, and in others, they are taxable because they are not food. Sometimes they are taxable (or not) because they are an ingredient in food but not food eaten on its own. Some sizes of marshmallows may be taxable while others are not, and marshmallow creme is often not taxable even if marshmallows are.
The same pattern can be seen with clothing, pumpkins, fruit, jewelry, digital items, membership fees…if you can buy or sell it, there is probably a circumstance under which it is taxable somewhere and a circumstance under which it is not.
The cost and time commitment involved in keeping track of all this is enormous. If everyone in all circumstances just pays 23% sales tax no matter what, the savings could be significant and the resulting revenue could be increased.
The problem with sales tax
The biggest and most obvious problem with sales tax may be the regressive nature of the tax. An individual earning $100,000 per year probably would never consider buying marshmallow creme in order to save 6% on sales tax. Sales tax is a small matter for affluent people.
For the needy, that extra 23 cents can make a difference. The poor spend a higher proportion of their earnings, while people with higher incomes save more. And since they have more money, to begin with, they are better able to adjust to the extra expense of sales tax than a family with less margin.
It is also customary to charge sales tax on things that are not essential, not on items required for life. This is why so many states charge less for food or exempt it entirely. That’s also why otherwise serious legislative bodies spend hours trying to determine just when marshmallows should count as actual food.
It’s also complex to come up with suitable rates. Currently, jurisdictions tend to think in terms of the amount of revenue they want and build their equations from there. The Brookings Institution lays out the requirements for doing this on a national basis:
- There is zero tax evasion
- State and local taxes do not change
- The tax base is not reduced by political or other factors
- Nominal government spending is held constant
- Transition issues and economic growth are ignored
If all those things were true, they figure, the national sales tax would need to be set at 23% on a tax-inclusive basis. However, they figure that there would have to be transitional plans, offsets, credits for needy families, and adjustments based on the effects of higher prices on supply and demand. In real life, they figure, the total sales tax would actually have to be much higher.
It doesn’t appear likely that this change will take place in the near future. However, there are changes in sales tax regulations every day. Unless you have people who really live and breathe sales tax, you might be better off outsourcing your sales tax compliance to us.
We are specialists. We know all about sales tax. We have found that for most of our clients, it is actually more affordable to let us take care of the entire process than to choose our software and handle it in-house.