Do American firms remit online sales tax to foreign countries?

The Trinidad & Tobago online tax measure is not pragmatic on either side of the equation from a human resources perspective.

Pieter Brueghel the Younger, "The tax collector's office," oil on board, 1640. (Public domain image via Wikipedia entry on Taxes)

TRINIDAD & TOBAGO, December 26, 2016 — According to Trinidad and Tobago Finance Minister Colm Imbert, that country’s recently instituted Online Sales Tax measure netted over $2.5 million in the months of November and December. The new tax measure, originating in the 2016 fiscal year and presented at the Midyear Budget review, authorizes a 7 percent online sales tax on all foreign transactions and is intended to make up for unanticipated decreases in oil revenues.

American companies, often averse to overreaching regulatory manipulation, have conceded tax revenue without the usual legal dispute. Most American laws affecting U.S. companies only go into effect after heavy lobbying efforts and usually result in substantial litigation. The American court system is replete with cases regarding the application of the commerce clause’s regulation of taxing authority.

For instance, Quill Corp argued that the state of North Dakota did not have the power to compel entities without a physical presence in the state to collect and remit sales tax to state authorities for customer purchases originating in North Dakota. Under the federal  commerce clause states are restricted from prohibiting interstate commerce by imposing duties and taxes.

Amazon fought similar attempts by New York State in 2013, arguing that under the commerce clause and articles of due process, New York’s State’s attempt to compel Sales and Use tax collection was unconstitutional

Taxes associated with transactions originating on web based platforms are controversial. Brick and mortar collections are easier to quantify through a “shelf test” assessment. In a shelf test, officials visit physical locations making projections based on physical inventory on the shelf to extrapolate the amount of tax due to the government as a result of estimated sales.

Without a physical location, it is more difficult to scrutinize retail operations. Conducting a shelf test on an international entity is cumbersome and speculative at best. While shipping manifestos provide traceable links to items shipped to Trinidad and Tobago, they do not substantiate the origination of the purchase.

An audit would need to determine both the origination of the purchase and the destination of the items. Examining all transaction records from multiple corporate entities with aggregate sales equaling or surpassing the national budget is not only cost-prohibitive from human resources perspective, but also from a litigation perspective.

In event of alleged fraud or malfeasance, in which court would Trinidad and Tobago have sufficient standing to make a claim to redress the damages? How would a judge quantify damages in a floating exchange rate system for transactions over a period of time? 

The World Trade Organization (WTO) policy on direct taxation follows these principles:

“International rules concerning measures that affect trade and those regarding direct taxation appear to have broadly similar goals, namely the removal of obstacles to the cross-border movement of goods, services, capital, labor and technology.

“The principle of NT (Found in Article III of the GATT and Article XVII of the GATS) entails the commitment by a country to treat imported goods and services as well as those produced by foreign-owned or—controlled enterprises operating in its territory no less favourably than goods and services produced by domestically owned or—controlled enterprises … Internal taxation discriminates neither against imports nor among sources of imports.”

What is damaging to the American economy is the precedent it sets for collection. Sales tax is subject to arbitrarily set rates without any distinct recognition of the economic impact both present and future for corporations. Considering the manpower necessary to manage the remittance to nations as small as Trinidad and Tobago, approximately an eighth the size of New Jersey, how many purchases could one such jurisdiction make from a single corporate entity to justify the expense?

The reported $5 million in collections is less than one million U.S. dollars split among all retailers. While this is a bonus to Trinidad and Tobago from a revenue perspective, the loss in terms of restricted consumption on both economies is not readily calculable and won’t be until a full year of transactions are available to establish a baseline for comparison and the cost of compliance and the drain on consumer income still exists.

One can reasonably estimate that this 5 million could have been saved in the local banking system, supplementing consumer income and demand and increasing the money supply, thus generating room for capital investment as consumers and banks create gain on interest rates.

The Trinidad & Tobago measure is not pragmatic on either side of the equation from a human resources perspective. From an implementation perspective companies only remit payment at or above a specific dollar value or threshold leaving room in that threshold to accommodate sales returns, in the unlikely and possible event that a consumer is unsatisfied with the product and decides to obtain a refund from the company. Under those circumstances the company deducts the sales tax on the return from the aggregate due to that specific jurisdiction.

Some scholars reason, incorrectly, for remote sales tax on the basis of tax neutrality:  

“…sales for consumption while taxing local sales for consumption would violate the fundamental principles of economic neutrality that “[t]axation should . . . be neutral . . . between conventional and electronic forms of commerce” and that “[t]axpayers in similar situations carrying out similar transactions should be subject to similar levels of taxation. — “Taxing Remote Sales in the Digital Age: A Global Perspective,” by Walter Hellerstein.

This argument does not hold true on any level. Two taxpayers from different states purchasing the same product from a physical store may or may not be subject to a sales tax, or subject to sales tax at different rates, depending on the laws of their individual state. Take cigarettes for example. Virginia has 30 cent per pack tax and New Jersey has a 2.70 cent per pack tax. Hardly neutral.  

Similarly, two taxpayers from the same state may be subject to different tax rates from purchases of the same product if the physical locations are in different states, or in different parts of the same state. Legislation forming Urban Enterprise Zones (UEZ) allow businesses in specified zones to charge half the customary sales tax rate.

The application of neutrality is misappropriated by Hellerstein. If it does not exist in the brick and mortar commercial environment, it certainly cannot apply to online sales. The only neutral application is no taxation as the following comments correctly point out:

“…states must balance revenue needs with the reality that companies, and especially those involved in e-commerce, are more able than ever to avoid or abandon jurisdictions with what businesses perceive are punitive tax policies.” — “National Tax Journal,” September 2015, 68 (3S), 735-766.

“States wishing to attract or retain these businesses need to know how their policy choices affect the location decisions of this unique and rapidly growing sector of the economy.” — ” National Tax Journal,” September 2015, 68 (3S), 735-766.

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