Stop Run-Away State Sales Tax

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By Dr. Kevin McNamee

Economists consider sales tax to be one of the more transparent methods to collect tax revenue.1 It is based on consumer’s freedom of choice to purchase a product and the associated sales tax. It is a more transparent method to collect tax revenue when compared to complex graduated income tax rates.1

Of the 50 states and District of Columbia, five states do not have a statewide sales tax.1 Thirty-eight states have additional local sales tax.1 Sales tax rates differ by state which influences consumer behavior to shop across state lines or purchase online.2 State revenue collected is influenced by the state sales tax rate.3 Businesses located outside higher sales tax areas enjoy a competitive advantage over those businesses located in higher sales tax areas.4

A problem is created when a significant sales tax rate difference exists between states where residents make out-of-state purchases and are not charged sales tax. Consumers make purchasing decisions based on what is in their best interest. When consumers purchase online from other states, in-state sales tax is being dodged.3

An example of this behavior is observed in Salem County, NJ where officials exempted the city from the state’s 6.875% sales tax but collects 3.4375% so it can compete with neighboring, zero tax rate state, Delaware. By allowing this reduced rate, New Jersey officials acknowledge that their high statewide rate is uncompetitive with Delaware.5

In Chicago, consumers make major purchases in the suburbs or online to avoid the 10.25% sales tax rate.6

These examples show how consumers vote with their pocket book and their feet by leaving high-tax areas to make major purchases in low-tax areas or out-of-state, online purchases to avoid in-state sales tax. States are losing both sales tax revenue and business tax revenue with the current status.

The model to stop out-of-state, non-reported on-line purchases and assist business in higher tax areas rests with car dealerships’ calculation of sales tax. Regardless of where the dealership is located, the sales tax rate charged, is based on the purchaser’s city residence. This avoids shopping in lower tax rate areas for the sales tax savings. It keeps dealerships in higher sales tax areas competitive.

If the local sales tax is removed from the total rate, California leads the way with the highest state-level tax rate at 7.25%.7 When combining the average local tax rates, California ranks 10th at 8.25%8 however many California cities like Los Angeles, the tax rate is closer to 10%. The lowest non-zero state-level sales tax is 2.9% in Colorado. Excluding the zero tax states, the average state sales tax is 5.69%.8

Stop Run-Away State Sales Tax 

1. Consumers making out-of-state, online transaction are charged their state’s sales tax rate.
2. For those who reside in a zero sales tax state, the average sales tax of 5.69% is used.
3. The collected out-of-state sales tax revenue is sent to the federal government who forwards it to each state.
4. To minimize business’s clerical burden, the federal government becomes the clearing point for one reporting form.

Conclusion

Using the narrow sales tax minimum and maximum range of 4.35%,9 the  incentive to purchase out-of-state is reduced or eliminated due to increased shipping costs. States will keep its businesses competitive, increase its commerce and realize increased revenue from the current, unreported, online, out-of-state purchases by its residence.

City, county and state governments should unify under this goal and lobby Washington legislators to establish a national sales tax reporting system. It will recover and return current unreported sales tax revenue to the state; encourage purchases to remain in-state which increases job growth and expand the local economy.

Dr. Kevin McNamee, a 2018 candidate for the Thousand Oaks City Council, is a 20 year resident of Thousand Oaks and business owner for over 28 years. As a member of the Thousand Oaks Rotary, he volunteers his acupuncture and chiropractic clinical services at the Westminster Free Clinic to many of the city’s illegal immigrant and under-served population. His practice specializes in Asian and herbal medi- cine, blended with traditional Western diagnostics and treatment protocols. In addition to his practice, Dr. McNamee provides pain prevention services to organizations like the Los Angeles Police Department and expert witness legal services. Dr. McNamee’s Anti-Drug presentations for middle and high school students have helped change student attitudes about illegal drug use and abuse. He is also a part- time instructor at Ventura College in the Water Sci- ence Department.

www.CaliforniaHealthInstitute.com

References

1. Walczak, J., Drenkard, S., State and Local Sales Tax Rates in 2017, Tax Foundation Fiscal Impact, Washington, DC, No. 539, Jan. 2017 p. 2

2. Mehmet Serkan Tosun and Mark Skidmore, “Cross-Border Shopping and the Sales Tax: A Reexamination of Food Purchases in West Virginia,” Working Paper 2005-7, Regional Research Institute, West Virginia University. http://rri.wvu.edu/wp-content/uploads/2012/11/Tosunwp2005-7.pdf. See also, Randolph T. Beard, Paula A. Gant, and Richard P. Saba. “Border-Crossing Sales, Tax Avoidance, and State Tax Policies: An Application to Alcohol,” Southern Economic Journal 64, No. 1 (1997): 293-306.

3. Walczak, J., Drenkard, S., State and Local Sales Tax Rates in 2017, Tax Foundation Fiscal Impact, Washington, DC, No. 539, Jan. 2017 p. 1

4. Len Lazarick, “Raise taxes, and they’ll move, constituents tell one delegate,” Marylandreporter.com, Aug. 3, 2011, http://marylandreporter.com/2011/08/03/raise-taxes-and-theyll-move-constituents-tell-one-delegate/.

5. Walczak, J., Drenkard, S., State and Local Sales Tax Rates in 2017, Tax Foundation Fiscal Impact, Washington, DC, No. 539, Jan. 2017 p. 5

6. Susan Chandler, “The sales tax sidestep,” Chicago Tribune, July 20, 2008, http://articles.chicagotribune.com/2008-07-20/business/0807190001_1_sales-tax-tax-avoidance-tax-landscape.

7. Haleigh Pike, “California’s Sales Tax Rate to Decrease in January 2017,” KRCR News, Dec. 30, 2016, http://www.krcrtv.com/news/local/shasta/californias-sales-tax-rate-to-decrease-in-january-2017/238477141.

8. Walczak, J., Drenkard, S., State and Local Sales Tax Rates in 2017, Tax Foundation Fiscal Impact, Washington, DC, No. 539, Jan. 2017 p. 4

9. Walczak, J., Drenkard, S., State and Local Sales Tax Rates in 2017, Tax Foundation Fiscal Impact, Washington, DC, No. 539, Jan. 2017 p. 4

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