A Taxing Treasure

Feb 01, 2003 10:30 PM  By

I WAS IN VENICE RECENTLY, feeling a little glum because I couldn’t think of anything America has produced that could rival such a beautiful, mysterious city. Sure, our cities have some notable buildings of their own, even wonderful neighborhoods, but what have we built that is as complex and intricate, and yet somehow complete, as that ethereal place?

Now that I’m home I’ve found a reason to hold my head high. Truth is, we Americans have a vast monument of our own that’s far superior to that canal-choked old town. Given a thousand years and some key trade routes, anyone could build a gorgeous city on 116 islands. However, it takes a special kind of genius to create a tax system that involves 7,500 separate state and local sales tax jurisdictions, each with its own distinct set of rules.

Around 60 years ago, we created not just a tax system, but a vast archipelago of regulation with enough bizarre nuances to keep thousands of the country’s best minds busily and profitably occupied forever.

Some say that all these 7,500 tax regimes serve no purpose. Why should marshmallows, for instance, be considered food in Minnesota (and tax-exempt) but candy (which is taxable) in Tennessee? What possible good does it do the economy to have 1,300 different tax districts in Texas?

I say, it all depends on your point of view. Just as a gondolier looks at a canal and sees not an obstacle but a pleasant, 60-euro-an-hour job, so too does a tax lawyer look at our sales tax rules and see a quick $400, helping companies decide whether they should classify handkerchiefs as an article of clothing.

Each of the 45 states with a sales tax has its own system, according to David Hardesty, vice president of Larkspur, CA-based Markle Stuckey Hardesty & Bott, an accounting firm that does a lot of sales tax work for e-tailers. “They don’t even agree on what a sale is. You could have an interstate telephone call and the call can be taxed differently in two states,” he says.

As a result, even in this digital age, American sales tax collection remains an art largely untouched by time. Professionals say managing sales taxes is still slow and time-consuming work, and even computerization hasn’t really helped much. After all, what logical machine could follow the twists and turns of the bureaucratic mind?

“[The software is] helping, but I haven’t really noticed that it’s a heck of a lot simpler than it used to be,” says Hardesty.

And the benefits to the republic don’t end there. Frank G. Julian, operating vice president and tax counsel for Federated Department Stores in Cincinnati, says that one study estimated that all in all, just collecting those taxes costs companies about 3.2% of all money raised. In his own company, he says, it takes millions to collect the $1 billion Federated passes on to the states every year. Such costs aren’t even counting the government jobs created by all those authorities, such as the Texas sales tax audit teams that reportedly rove the whole country to ensure that the Lone Star State gets its share.

Mad reformers in over 30 state governments are conspiring at this very moment to simplify our tax system through an un-American cabal called the Streamlined Sales Tax Project.

DIGGING CANALS

This past November, delegates from 32 states met in Chicago and agreed to make the states’ sales tax systems more uniform. Delegates agreed to submit legislation in their own states that would reduce the number of agencies that can collect sales taxes in their state and adopt the group’s master list of common product definitions. The agreement will actually take effect only when at least 10 state legislatures make all those changes, and then only if the combined sales tax coffers of those 10 states account for at least 20% of the $3.5 trillion in sales tax revenue state and local governments collect each year.

But don’t worry — you can’t suppress Yankee ingenuity for long. Some critics of the plan, including the Direct Marketing Association, believe the steam shovels of the anti-complexity corps may eventually be used to dig more canals, at least for mail order and online retailers.

“What they’re afraid of is if it gets so simple, the states will then go to Congress or to the courts, either one, and say ‘Listen, there’s no reason why these companies shouldn’t collect the tax. We’ve made it simple,’” says Hardesty.

If that were to happen, Julian says, the new requirements could make compliance very tough for small remote retailers. Big companies such as Federated could absorb the added cost, he says, but a sudden change could drive some smaller merchants out of business.

Still, in spite of the November accord, Hardesty predicts that the sales tax system is unlikely to be disturbed for at least the next year, as the many business and political interests that prefer the status quo fight the changes. Ultimately, Hardesty believes that simplification will come — many states and big national retailers favor it — but for the moment, our national treasure is safe.

BENNETT VOYLES is a New York-based business writer who writes frequently on finance issues. He can be reached at benvoyles@yahoo.com