NCPA - National Center for Policy Analysis


January 25, 2005

States are estimated to lose about $50 billion in revenue each year from untaxed Internet purchases. However, in late 2002, 34 states and the District of Columbia agreed to the Streamlined Sales and Use Tax Agreement (SSUTA) which allows members to apply a uniform code for taxing items on the Internet. SSUTA determines which items are taxable and which are not. For example:

  • Aprons, baby receiving blankets, costumes, disposable diapers and ear muffs are considered "clothing" for tax purposes.
  • Belt buckles, costume masks, patches and sewing materials are not.
  • The tax rate is the one where an item is delivered, not the location of the business where the item originates.

However, the passage of the SSUTA must be approved by Congress, since states are currently not permitted to tax "extraterritorial income earned by remote sellers."

While SSUTA would bring additional tax revenue to states, extending sales and use taxes to out-of-state sales is bad for taxpayers and the economy, says Veronique de Rugby of the Cato Institute. It violates the spirit of competition among states, strips states of their sovereignty and in essence, creates a tax cartel.

Furthermore, Colorado Governor Bill Owens, who is the most outspoken critic of SSUTA, says it will create burdens for merchants:

  • SSUTA takes a broad view of taxable goods; therefore, certain items that were tax-exempt in a state would likely end up being taxed under SSUTA.
  • Streamlining taxes across thousands of local tax jurisdictions will require merchants to calculate taxes for up to 7,500 different tax rates.

Moreover, merchants would be subject to some 46 various audits if they are forced to assume the role of tax collector.

Source: Paul Chesser, "States 'Streamline' Their Taxes for Internet Sales," Carolina Journal 13, no.11, November 2004, John Locke Foundation.

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