by J Scott Christianson, Columbia Daily Tribune Columnist

Back in August, Hank Waters opined that purchases made over the Internet should be subject to sales tax. His argument was based on the idea that it is not fair to exempt Internet purchases from taxation when purchases from local retailers are subject to sales tax. Beyond fairness, the impact of tax revenue loss to local and state government was also part of his argument. Waters’ arguments are correct.

Waters’ editorial set off a reaction of letters, Trib Talk calls and an opinion piece from local author and Internet shopping guru Diana Ratliff. Ratliff argued that the imposition of a sales tax on Internet purchases would be an accounting nightmare for budding e-tailers, thereby stifling the growth of Internet commerce and limiting online retail to just the “big boys” – Amazon, Dell and the like.

Ratliff’s arguments are correct. But Waters and Ratliff are incorrect in their assumption that purchases made over the Internet from out-of-state companies are not taxed. The fact is that online purchases made by consumers are subject to tax. However, in lieu of sales tax, such purchases are subject to a consumer use tax. What is weird about this tax is that the retailer is not responsible for collecting it. Instead, it falls on the consumer to report and pay this tax each year.

Currently, the state of Missouri requires anyone who purchases more than $2,000 worth of goods over the Internet – or by mail order or phone – to report and pay a consumer use tax, currently set at 4.225 percent. The $2,000 figure is not an exemption but rather a threshold for reporting. So if you have $2,020 in purchases, you have to report and pay tax on the entire $2,020, not just the extra $20. The tax would be about $85 in this example.

In addition to the state use tax, municipalities can also assess a local use tax on top of the state’s 4.225 percent, just like they can with sales tax. Some 500 Missouri county and city governments have elected to assess a use tax, so if you live in any of those places, the tax on your Internet purchases is higher. The highest amounts are for Missourians living in the Platte County portion of Kansas City (7.975 percent) and in the St. Charles County portion of Wentzville (7.950 percent).

Columbia currently doesn’t collect any such use tax; voters last rejected a proposal to do so in 1998. At the time, it was estimated that matching a consumer’s use tax to the local sales tax rate would generate about $880,000 in revenue for the city annually. Regardless, I am sure that everyone in Columbia who makes purchases on the Internet keeps a running tab of all purchases during the year, and if they find that total to be over $2,000 on Dec. 31, they quickly download the Missouri Department of Revenue Form 4340 and send in what they owe to the state – yeah, right.

By requiring the use tax to be self-reported by the consumer, the state has set up a system that is unfair in many ways. First, most people are not even aware that a consumer use tax exists and therefore don’t pay it. Those who do pay it are mainly business owners who already file sales tax and vendor’s use tax – a tax retailers pay on items they purchase without paying sales tax but use in their business instead of reselling to a consumer. Only when individual citizens get audited by the Department of Revenue do they become aware of the need for paying taxes on their Internet purchases, which they are required to pay for past years as part of their audit.

The issue of fairness in taxing Internet sales extends well beyond the business community and local government to every one of us with a PC and an Internet connection. After all, why should you pay use tax on your Internet purchases when your neighbor doesn’t? Right now the playing field is not fair for businesses or consumers. It seems clear that for consistency’s sake, retailers should be responsible for collecting use tax from their out-of-state customers.

Ratliff’s argument that the burden of calculating and reporting any such taxes would be stifling to small business is not necessarily correct. Most small businesses on the Internet use the services of a larger company to securely collect online payments, and most of those services have a means of collecting sales tax for in-state transactions. There is no reason it couldn’t be calculated for other states as well. But calculating the tax is not the problem. Doing all the paperwork to report the tax is the problem – trust me, I know from experience. Requiring a business to submit reports to 50 other states would be overly burdensome and unfair. If businesses are to take on the task of collecting use tax, the system must be simplified.

A better approach would be for each state to set a flat use tax for online transactions, forgoing any additional use tax assessed by local municipalities and thereby limiting the maximum number of possible tax rates to 50. Moreover, a business should be able to remit all collected use tax to its own state department of revenue, which would in turn disperse all use taxes to other state departments of revenue as appropriate. Such a system could be set up entirely through an interstate compact, keeping the federal government and Congress entirely out of the matter. While we all might differ in our opinion of the benefits or evils of taxation, we can all agree that any tax system that taxes some while not taxing others is inherently unfair and unhealthy for free commerce. Regardless of the solution, fixing the problems with consumer use tax and the taxing of Internet sales should be a priority.