By Adam Thimmesch
For a few years now, I’ve gently pushed the idea of Use Tax Tuesday to follow Cyber Monday. Why not follow one of the biggest tax-avoidance days of the year with a day dedicated to undoing that damage? As much as this makes sense to me, it appears that I have lost out to Giving Tuesday, and probably rightfully so. Nevertheless, I want to suggest that Use Tax Tuesday can easily be folded within the more general ambit of Giving Tuesday. Maybe all is not lost.
Use taxes have (oddly) fascinated me for years. They are an absolutely critical part of states’ consumption tax systems, but they get very little attention. In the debates about the collection of tax on online sales, it is only rarely mentioned that the tax at issue is actually the use tax. The distinction is fairly labelled as semantic, but it is very real. The Supreme Court has clearly held that states cannot constitutionally impose sales taxes on sales that occur outside of their boundaries, but that they can impose identical taxes on the use of the purchased goods or services within their boundaries. The tax collected on an online purchase is therefore a use tax. Of course, the Court has also held that states cannot require vendors to collect their use taxes unless those vendors have some physical presence in the taxing state. (I’ve previously blogged about that here.)
That physical-presence rule has been of increasing economic consequence in recent decades because of the rise of online commerce. This year, online commerce on Cyber Monday was the highest in history at $6.6 billion and exceeded Black Friday online sales by $1.6 billion. This combination of factors means that the collection of a lot of tax revenue is left to consumer voluntary compliance. States are slowly starting to chip away at that though.
First, Amazon now collects use tax in every state with such a tax. States are also moving to require tax collection by “online marketplaces” like Ebay and Amazon’s “Fulfillment by Amazon” program. Finally, a petition for certiorari has been filed in a case challenging Quill and the Court’s physical-presence rule. (I’ll surely provide more thoughts on that in a future post.) Suffice it to say at this point that attention to vendor collection of use taxes is going to heat up in the coming months. Notable in that statement, though, is that the focus is on vendors and their collection of the tax. There is virtually no attention being given to consumers and their personal tax obligations.
The reason for this focus is not a mystery. Common wisdom is that focusing on compliance by individual consumers would be a fool’s errand. The costs of auditing individual taxpayers would surely dwarf the benefits. A taxpayer in a state with a 7% sales and use tax rate who purchased even $2000 of goods tax free would only owe $140 of use tax. The numbers just don’t add up. That isn’t even mentioning the political cost of going after individual consumers in what could be classified as a “tax increase,” though it clearly would not be a tax increase.
Notwithstanding this reality, I’ve been proposing that state attention to individual compliance is warranted. A longer version of my arguments can be found here. David Gamage, Darien Shankse, and I have also recently offered arguments to the same effect in a shorter version here. Without getting into the details, attention to consumer compliance is important for economic, rule of law, and tax-compliance reasons.
This brings me back to Giving Tuesday. Without rehashing the case for consumer-focused actions or outlining all of the options, one idea that I am particularly interested in is allowing taxpayers to designate, to some extent, where their use tax payments would go. Giving taxpayers the option to express their voice in this way has been show to increase civic engagement and to help increase taxpayer morale and tax compliance. (A longer version of this idea and the academic support can be found within this article.) None of these are bad results.
So why not build this into the use-tax system? Why not let taxpayers direct their payments among a limited set of choices? The vast majority of taxpayers aren’t currently paying any use tax, so it isn’t as if a state would be stuck trying to figure out how to reallocate resources. Almost all of the money paid in would be “new” money. Maybe taxpayers could choose between a fund for road maintenance, state aid to schools, or funding social services. Maybe the money could be used for a property-tax credit fund or for funding for the police.
The particular options aren’t important, but giving taxpayers voice in their use-tax payments would seem to provide multiple benefits–not the least of which is that Use Tax Tuesday could live on as a subset of Giving Tuesday. Taking part in that broader movement would certainly seem to be more palatable than being one of the few who pays use tax. Until that happens though, I’ll keep paying my use taxes and assume that my check is on the Wall of Fools at the Nebraska Department of Revenue.
 McLeod v. J.E. Dilworth Co., 322 U.S 327 (1944); General Trading Co. v. State Tax. Comm’n, 322 U.S. 335 (1944). This is one of many areas where the Court’s Dormant Commerce Clause decisions on state taxes rest on distinctions without meaningful economic difference. More about that in a future post, perhaps.