Sales tax rules don't make sense

I think the North Carolina General Assembly deserves loads of credit for making our tax code friendlier to growth, investment, and freedom. In one respect, however, the state still imposes too heavy a load. It requires too many out-of-state retailers to collect and remit sales taxes. Lawmakers ought to fix this problem when they reconvene April 24.

Yes, I know it may sound odd to prioritize a tax change that, by definition, won’t benefit businesses based here. But hear me out. Our current filing threshold is unfair and out of step with that of most southeastern states. Moreover, changing it will have only a modest impact on our future revenues.

First, some background. Until fairly recently, a state or local jurisdiction couldn’t really compel a company to charge and remit sales taxes unless it was headquartered or had a substantial physical footprint in the jurisdiction.

The rise of online commerce rendered that standard increasingly hard to defend. In 2018, the US Supreme Court issued a pivotal decision in a case called South Dakota vs. Wayfair. Rather than requiring a physical presence in a jurisdiction to establish a “nexus” for tax purposes, the majority ruled that it would be enough to have a significant economic presence in the jurisdiction.

In other words, if a company in Oregon does a substantial amount of business with consumers in North Carolina, the company ought to be required to collect and pay sales tax to North Carolina. Otherwise, competing retailers in North Carolina have to shoulder higher compliance costs and charge higher prices (because there’s a sales tax embedded in them).

Moreover, the argument goes, governments charge sales taxes in order to pay for public services. While it makes intuitive sense that businesses with a physical presence in a jurisdiction collect taxes to help pay for the services that pay their operations possible, even remote sellers and their customers benefit from some public services (one example might be courts for adjudicating potential disputes) and thus ought to have a role in financing those services. Rightly or wrongly, the four-justice majority agreed.

Now, Wayfair doesn’t allow governments to compel all retailers in the country to collect and remit sales taxes, regardless of how much business they do within a given jurisdiction. The justices ruled that small retailers ought not be unduly burdened, though they left it up to states to set the minimum thresholds that would trigger sales-tax liability.

Manish Bhatt, a senior policy analyst at the Tax Foundation, observed in a recent study that states with sales taxes have chosen three different solutions. Twenty-five states — including our neighbors South Carolina, Tennessee, and Georgia — use a minimum dollar amount of retail sales as the threshold. Another 19 states, including North Carolina, require that retailers with a minimum revenue or a minimum number of retail transactions in their jurisdictions collect and remit sales taxes. Finally, Connecticut and New York require both a minimum revenue and a minimum number of transactions to trigger sales-tax liability.

Bhatt argued that the transactions threshold should go. “Establishing economic nexus through transactions alone is quite burdensome,” he wrote, “as compliance costs associated with collection and remittance requirements could be greater than the business transacted.”

North and South Carolina illustrate the difference. Both states have set the minimum sales figure at $100,000 a year. But only North Carolina requires that out-of-state retailers with less than $100,000 in annual sales still file taxes if they conduct at least 200 transactions in the current or prior year.

This is preposterous. I admit that very few small retailers are likely to be caught in this net — but none deserves to be. If your company is doing less than $100,000 in sales here, your “economic presence” in North Carolina is minuscule. Our sales-tax rule may make you doing business here a waste of your time.

I’d rather let North Carolinians decide from whom they buy goods and services. Our state should adopt South Carolina’s standard.

John Hood is a John Locke Foundation board member. His latest books, Mountain Folk and Forest Folk, combine epic fantasy with early American history.