Why It's Time For a National Sales Tax

The VAT works well in nearly every other developed nation and it can work just as well here. It would replace our current, complicated and frustrating sales tax system with something much more simplified.
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You know what's worse than getting a notice from the IRS? It's getting one of those "request for information" forms from the state of Michigan. Or any other state for that matter.

Just ask Cindy. She's the controller at a Pennsylvania based client of mine. This company has the misfortune of being profitable in an age where governments are desperately seeking tax revenues. And they also have the misfortune of selling their products to customers located all around the country. Some of their products are sold online. But most orders are taken the old fashioned way -- by phone or email. The states don't care. They want money.

"I get requests like these all the time," Cindy told me. "And they terrify me."

Why? Because Cindy's company not only has customers around the country, but they have in the past employed a lone sales rep here and there. Or rented out a small warehouse to store goods now and then. And woe upon them for doing this. Because the minute a state like Michigan smells that there was some type of business done under their nose the "information requests" begin. And if you're naïve enough to honestly respond to one of these requests you could be setting yourself up for an avalanche of further requests, tax forms, nasty-grams and other notices from the state bureau of collection trying to grab some cash. For a small business trying to do the right thing it becomes an administrative nightmare over a small amount of money. And, oh God... let's not get into calculating "use" tax. Does anyone really understand that? I tell you who does: high-priced CPAs and attorneys that many businesses are forced to hire to tackle this nightmare.

This is why we need a Value Added Tax (VAT). We need to eliminate our complex, bureaucratic state tax system and replace it with something more simple: a federal tax on spending. It's been debated before. It needs to be addressed again.

It's not about the deficit (although I wouldn't be averse to some contribution being made there). I am not suggesting a new form of taxation. I am suggesting relief for small businesses like Cindy's. And although I'm never a fan of the federal government taking control of anything, this is one area where Washington needs to step in. Especially now.

Because now there's a huge debate about Internet taxation. Large online retailers like Amazon.com are embroiled in arguments with New York, California, Michigan, Minnesota and other municipalities looking for blood. They see companies located thousands of miles away selling millions of dollars of products to their residents via the Internet and they want a piece of the action. A 1992 Supreme Court decision found that retailers can't be forced to collect sales taxes on out-of-state purchases unless they have a physical presence in those states. More than 20 years and billions in deficits later, states are trying to find ways around this law. They are trying to find evidence of employees, warehouses or other signs of local activity or ownership to prove grounds for charging sales tax on purchases. Amazon is getting all the attention. But if (and as) they lose these state by state arguments a precedent is set for any business, big or small, that sell their products online.

Congress is now getting involved with a new push to pass a Federal Marketplace Fairness Act for online sales. Groups like the National Taxpayers' Union are strongly opposed. "... the latest proposal will... undermine tax competition among the states, tilt the commercial playing field in favor of big-box stores and upend the constitutionally based doctrine of physical presence that has shielded sellers and buyers from out-of-state collectors reaching into their pockets," says their vice president.

But here's the last straw: The federal government recently announced that it will continue to make pennies, even though the typical penny costs two-and-a-half cents! Why? Because one of the biggest reasons against stopping this production is that the current state sales tax systems "... could not function without pennies to pay the odd tax rates."

OK... enough! We need a national sales tax. A VAT!

Yes, the VAT has issues. Big issues. A spending tax is regressive -- it hurts lower income people more than higher income. It will be difficult to unwind all the state tax systems and make it so that the states get their fair share. The federal infrastructure would cost. Some may be nervous with more federal involvement in our affairs. And, for some businesses, it may increase their administrative burden. I get this. I'm a small business owner. I'm not a fan of the federal government. But I also know when a system isn't working. And our state tax system isn't a system. It's 50 systems. And within each system there are other systems. It's enough already. We have to simplify this.

Let there be one national sales tax, a VAT. Let it be administered by a federal agency. Agree on a national rate. Let the Feds collect the tax and then distribute it out to the states. The states will be happy because they'll start collecting money that they didn't collect before, which will be a revenue boon to them. They will be able to eliminate all the costs associated with sending those nasty-grams to companies like Cindy's as well as the costs for collecting sales tax in their own state. The Feds can charge the states to cover their costs for administering the program. And although this is not my main reason, if (and only if) they attain certain agreed upon financial milestones, their "vig" can go towards reducing the nation's deficits.

Will some people suffer from a national VAT? Will small businesses? Yes, many consumers will have to pay an extra tax that they're not currently paying. But this is based on their spending so the choice is up to them. And I believe in the power of the American consumer... an extra few percentage points isn't going to turn people away from buying that big screen TV to watch The Bachelor. And if done correctly, a national sales tax rate should be lower than what most states are currently charging.

For businesses the transition would be worthwhile too. Yes, a federal VAT form would need to know sales by state by month. But most accounting programs can easily provide these reports. The administrative burden of dealing with 50 different states would be eliminated. And let's not forget: 2.5 cents to make a penny? C'mon!

The VAT works well in nearly every other developed nation and it can work just as well here. It would replace our current, complicated and frustrating sales tax system with something much more simplified. It would end the debate over Internet sales and ease the pain for many small businesses struggling to cope with the filing requirements of 50 different states. And, if incentivized the right way, it could help contribute to paying down the deficit. No, I do not want new taxes. I do not want a more powerful Federal government. I just want an easier and more efficient system for clients like Cindy.

A version of this blog appeared in Inc. Magazine.

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