Tax Analysts Blog

A Sales Tax Conundrum

Posted on Jan 29, 2014

The sales tax has been a blessing and a curse. One of its great virtues is that it is collected by the vendor, which then remits it to the state. Neither the taxpayer nor the tax agency has much to do except pay and collect. The vendor does the work. The success of the sales tax for the last 90 years is largely attributable to vendor collection. But if the vendor doesn’t collect and remit the appropriate tax, it is liable for the amounts. The vendor will have to pay the unremitted tax and could face severe penalties and even criminal charges.

So if a vendor is unsure about the status of an item it’s selling, it will collect the tax. Better to collect and remit tax not owed than to face the consequences of a mistake. Identifying what was subject to tax was a problem before technology and bar codes, but the problem may be reemerging in the electronic age. The Pittsburgh Post-Gazette reported recently that online retailers are collecting tax on items, such as clothing, that are not subject to tax in Pennsylvania. That may be a direct result of the Pennsylvania Department of Revenue’s 2012 announcement (Tax Update 163) that it would crack down on online retailers. Vendors are no doubt thinking that if they’re unsure, they should collect.

I am sympathetic with anyone trying to comply with Pennsylvania’s sales tax laws. The state exempts clothing but taxes fur coats, formalwear, bathing suits, and accessories. I am not sure what happens if you buy a fake fur coat. Would the seller know whether to impose the 6 percent sales tax? The formalwear distinction still cracks me up. If you buy a cheap tuxedo for $100, it is taxable. But a $3,000 Armani suit is exempt. It’s a screwed-up system.

As more states start requiring out-of-state online vendors to collect and remit sales taxes, there will be more confusion and uncertainty about what’s taxable. That will lead to more taxation of things that probably shouldn’t be subject to tax.

Read Comments (2)

emsig beobachterJan 29, 2014

The Streamlined Sales Tax Project website has a taxability matrix. Or, small
vendors can hire the services of Certified Service Providers (CSP) who will
handle the sales tax collection and remittance -- for a fee. The retailer will
have no audit liability; the CSP bears that liability.

The VAT BastardJan 30, 2014

Viva Brunori !!!

For a variety of reasons -- which are well established -- a retail sales tax is
the WRONG way to go about taxing consumption. The RIGHT way to tax consumption
is through a broad-based value added tax which reaches the service sector and
eliminates cascading. More than 150 countries around the world have already
figured this out and successfully replaced their archaic and inefficient RSTs
with a VAT. Like Canada, the U.S. would need to harmonize the VAT at a the
federal level (no deviations from the VAT base), but leaving the states free to
determine their local piggyback rate. The advantages of this are obvious; the
impediments are entirely political.

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