Subj: Internet Use Taxes: Perspectives of IPI: Center for
Technology Freedom
From: Bartlett Cleland <bcleland@ipi.org, (972) 874-
5139>Institute for Policy Innovation
To: Internet Caucus Advisory Committee


Use Taxes

A use tax applies to the location where a purchaser "uses" something he
purchased, and is generally considered the flip side of the retail sales tax. If a
resident of one state purchases something in another state, that doesn't
necessarily mean he can avoid paying a tax on the item purchased. The state of
residence can impose a use tax on the item.


Case Study #1:

Texas State Land Commissioner David Dewhurst was recently hit
unexpectedly with a tax bill from the Texas comptroller's office. According to a
news account, Dewhurst could have to pay up to $82,500 in taxes for purchasing
between $750,000 and $1.3 million in furniture, art and other items out of state.
The comptroller's office learned about Dewhurst and 300 other Texans
from the U.S. Customs Office. They now have to pay an 8.25 percent excise tax
on the value of the purchases. Dewhurst was caught unaware, according to the
story, but that is not surprising since almost no one knows about the law. And
had the comptrollers office not received notification from the Customs Office, the
tax never would have been levied.


Case Study #2:

The state of California recently sent 3,200 residents a tax bill for cigarettes
purchased out of state. According to the Orange County Register, thousands of
Californians are buying cigarettes online because they can get them cheaper and
pay no state tax. However, the out-of-state seller is required by federal law to
report the name and address of the buyer to the buyer's state of residence.

Use taxes can be very difficult to implement and monitor. As Dean Andal,
vice president of the California State Board of Equalization and a member of the
Advisory Commission on Electric Commerce, says:

Unlike the bricks and mortar business that state and local governments so
often argue are being discriminated against, the out-of-state retailer is asked to
do that which the in-state retailer is not: determine the place of use for each of its
customers. For example, the brick and mortar retailer doesn't ask if I'm taking my
purchase and going back to my home which is in a different taxing jurisdiction.
They don't care. The sales tax treats the place of purchase as the place of
consumption. However, if the same transaction occurred online, via the
company's web page, different standards would apply. If the store is in my home
state, most likely the sales tax would once again apply but the seller would first
have to determine the destination of the sale. If the seller was in a different state,
the use tax applies and the seller would have to identify the destination of the
sale and collect and remit based on the rules and rates for that local jurisdiction
assuming the company has nexus (reliance on zip codes is not legally sufficient
as many zip codes cross taxing jurisdictions). In the purely digital world, where
both the consumption of the agreement and the exchange of the product or
service occurs online, location is not just irrelevant; it can be impossible to
determine. The use tax is not a surrogate consumption tax as some would
suggest. It was a device conceived to protect in-state merchants.