Testifying to the US Senate Finance Committee recently during a hearing on internet sales taxation, Michael S Greve said that the way to reconcile the conflicting ideas of state legal integrity and tax equity was through origin taxation.
Mr Greve, Board Member of the Competitive Enterprise Institute, John G. Searle Scholar and Director of the American Enterprise Institute's Federalism Project, said that while he didn't expect Congress to adopt such a radical principle anytime soon, it was nonetheless the way to square the circle of Internet taxation that has defied solution under current destination tax rules.
In fact, it only seems radical. Even in Europe, which is backward in most respects, origin taxation is already applied to many parts of the VAT system, and the start-out plan to move towards a destination-tax system has been put on hold, probably permanently.
Recent attempts to instal a modern digital-product tax based on a modified origin system had been derailed by the insistence of high-taxing countries such as France and Germany that destination tax rates should apply, proving once more that cross-border destination taxes don't work in a complex, federal situation.
Mr Greve's remarks were as follows:
'Mr. Chairman, members of the Committee: thank you very much for giving me the opportunity to testify on the vexing question of interstate sales taxation.
'The thrust of my testimony is that the Congress can and should harmonize the contending principles of federalism, economic efficiency, and tax equity. At first sight, that may seem impossible. The Governors’ insistence on the states’ rights seems to run headlong into remote sellers’ strenuous objections to being regulated by states with which they have no tangible connection. The e-commerce camp’s insistence on that position, in turn, conflicts with the principle of tax equity, championed vigorously by mainstreet retailers. And so on. Federalism, equity, and efficiency can be reconciled, however, by providing that interstate sales through whatever channel (direct, catalogue, or Internet) are subject to sales taxation at their point of origin, meaning the seller’s home state—not, as is currently the case, on the basis of their destination, meaning the customer’s home state. As a practical matter, that solution requires federal legislation.
'I harbor no illusions about the political viability of adopting an origin-based approach, at least in the current round of legislation. While the proposal has been floated in the tax literature, in the publications of some think tanks (such as the Competitive Enterprise Institute, the Heritage Foundation, the Cato Institute, and—in an international context—the Progressive Policy Institute), and in some versions and applications before the Advisory Commission on Electronic Commerce, it has received little, if any, public and legislative debate and consideration, and time is running out. Alternative proposals under consideration, however, seem unattractive, unworkable, or both. Moreover, the choice between origin and destination as the basic regulatory principle has broad applications in other arenas—consumer privacy, for example, and especially the international trade matters under this Committee’s jurisdiction. In those arenas, the choice of the wrong jurisdictional principle—destination—would entail terrible consequences. In that light, I respectfully urge the Committee, and the Congress, to refrain from hasty e-tax legislation that might set a bad precedent and preclude a shift to origin-based taxation at a more opportune time.'
The Competitive Enterprise Institute is a non-profit public policy organization dedicated to the principles of free enterprise and limited government. Since its founding in 1984, CEI has grown into a $3,000,000 institution with a team of nearly 40 policy experts and other staff. It is nationally recognized as a leading voice on a broad range of regulatory issues ranging from environmental laws to antitrust policy to regulatory risk.
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