Cataloguing the Faults of a Mail-Order Tax

It seemed a modest bill, authorizing state sales tax on hitherto untaxed mail-order purchases. Nevertheless, it has generated inordinate noise in government, industry and the press.

Supporters get excited about new revenue for hungry states--the buyers’ states, not the sellers’. Critics say calculating and collecting four dozen different taxes will be impossible for mail-order companies and may mean the end of the business.

For all the flap, “it doesn’t raise an eyebrow on the face of the consumer movement,” says Mark Silbergeld, director of Consumer Union’s Washington office, “compared with housing and insurance and health costs.”

The issue rose over several decades, as armchair shopping got more attractive and mail-order catalogues got more successful: Catalogue revenue was about $40 billion in 1988. Simultaneously, many states got poorer, their revenue insufficient to meet their costs.

$3-Billion Estimate

Small wonder they wanted a piece of all mail-order sales to their residents, encouraged by in-state retailers, which felt the competition. Unfortunately, the Supreme Court ruled in 1967 that states couldn’t require mail-order companies to collect their sales tax unless the companies had a physical “presence” in the state. They could tax big national cataloguers such as Sears and Penney’s, which also had retail outlets there, but not pure catalogues such as L. L. Bean and Lands’ End.

They currently focus on an estimate of $3 billion in potential tax revenue. Actually, it’s more like $1.5 billion, says the federal Advisory Commission on Intergovernmental Relations, after subtracting Sears, Penney’s and other chains that already pay, plus companies below a proposed floor of $12.5 million in annual sales.

The House bill, proposed several times before by Jack Brooks (D-Tex.), authorizes states to tax “sales of tangible personal property” made to residents by out-of-state companies with annual revenue of more than $12.5 million nationwide or more than $500,000 in the given state. It’s backed by a coalition including state and local government organizations and retailers that already collect sales tax and resent the fact that mail-order companies and interstate discount catalogue operations don’t.

Many states are also passing their own legislation. California, for one, amended its sales and use tax law, saying that out-of-state retailers that solicit orders in the state or are paid by card or check on state banks have that necessary in-state “presence” and must collect tax. And to make the point stronger, California’s Board of Equalization estimated the nationwide sales of a number of catalogue companies, estimated 12% for California, and sent them bills for California tax on that revenue.

Hard to Track Purchases

Meanwhile, arguments rage about fairness and feasibility. Bill supporters characterize mail-order customers as yuppies, hooked on J. Crew clothes and L. L. Bean equipment, which can afford sales tax, but want to avoid it. Mail-order people prefer to talk about the elderly shut-in, on a fixed and limited income, dependent on mail orders for vital purchases.

Supporters point out that taxes support services benefiting the payer. Sales tax applies to goods bought in-state; its counterpart, “use” tax, is tacked on goods bought out-of-state but used in-state--most often cars, boats and airplanes. “California gets the tax on airplanes, boats and cars because they get registered,” says Gary Jugum, assistant chief counsel for California’s Board of Equalization, “but you can’t track down mail-order purchases.”

And why should they? “Cars use roads,” says Silbergeld, “but what about T-shirts?” Moreover, the goods come by road, but the carrier pays gas taxes. Catalogues ultimately need disposal, but “it’s the customers’ trash and they’re already paying,” says Bob Levering, Washington legislative counsel for the Direct Marketing Assn.

Such taxes, like an interstate tariff, remove one advantage of buying out of state. That can be appreciable on costly, brand-name electronic goods, cameras, even appliances and furniture ordered from faraway factory outlets or discount warehouses.

No one knows, however, what impact sales tax would have on many mail-order sales. People may not care, having turned to upscale catalogues not for a price break, but for quality, or service, or just for convenience. But they may be put off by the fuss of tax calculation if they have to do it.

Adding the tax, even 50 different state taxes, wouldn’t burden the companies because “there’s computer software that will do the calculation,” says James Goldberg, a Washington attorney representing the coalition backing the bill. Sears, he adds, handles the problem without trouble.

Passing On Expenses

Catalogue companies, however, say the costs of collecting, auditing, transmitting and maybe appealing 50 different sales taxes would be six to seven times those of a local store, “which collects one tax,” says Levering, “in a face-to-face dealing.” Worse yet, Edmund Scientific Co. in Barrington, N.J., for one, has many industrial and educational customers, which in some (but not all) states are exempt from taxes on some (but not all) items.

“Mail-order companies,” Lands’ End wrote customers, “will have to pass this expense along to you.” The Brooks bill wouldn’t just level the playing field, but would tilt it far the other way.

The fairness of this bill is partly dependent on its feasibility. There’s still room for refinements and alterations, or even for a switch in target.

All states could be assigned a 5% sales tax, with no exemptions allowed. Even easier, catalogue companies, like retail stores, could apply their own state’s tax on all sales, wherever the item goes.

If states insist on taxing goods that enter the state instead of goods sold there, they could be more creative. They could tax their residents’ magazine subscriptions and cable programs, perhaps even their insurance policies, their college tuitions (kids support out-of-state schools, bringing back costly knowledge). Why not tax wholesalers who ship interstate as well as retailers, abandoning the old custom of not taxing goods that will be taxed on resale?

They should go after easier money. Then everybody could use the time saved to get exercised about something more important.