Keep it simple. Keep it safe. NZ’s GST edition.

By Eric Crampton 19/04/2013

Every now and again, some bright spark wants to introduce GST exemptions for their preferred little pet project. It’s worth remembering just how awesome our GST is.

Josh Barro serves up a nice counterexample: sales taxes across the US states. He here notes one important problem with requiring internet vendors to remit sales taxes to the buyer’s state: too many states have thoroughly insane sales tax codes. Dealing with one state’s code is bad enough. Pile fifty of these on top of each other, and well….

The best argument that Amazon and other retailers raise against requiring them to collect and remit sales tax is that doing so is burdensome. Sales taxes are collected by 45 states and the District of Columbia, each with different rates and different rules about what is taxable.
These rules can get incredibly picayune and complicated. See this 1,437-word memo [link added] from the Wisconsin Department of Revenue, providing ten examples of cases in which the sale of an ice cream cake (or a slice thereof) might or might not be taxable. One of the examples hinges on the ratio of ice cream layers to cake layers –in Wisconsin, having too much ice cream in your ice cream cake can lead to a tax liability.
And one state’s picayune rules don’t necessarily conform to other states’ equally picayune rules. Both New York and New Jersey apply sales tax to candy but not to most other food, yet they have different definitions of what “candy” is. A Twix bar is taxable candy in New York, but in New Jersey it’s a non-taxable baked good. An online retailer has to keep up with this morass not in just one state, but in all of them.
More dauntingly, there are over 8,000 local sales taxing jurisdictions in the country, again with their own rates. New tax jurisdictions are created frequently and their boundaries do not necessarily conform to Zip or even Zip +4 boundaries. A few states, such as New York, even allow local jurisdictions to determine their own tax bases. One particularly relevant example for online retailers is that New York State does not charge sales tax on clothing and footwear under $110, but most counties in New York do – and sometimes a city has different sales tax rules than the county it is in.

He gives one way forward for an internet sales tax: administer it among states willing to run a single less-crazy state sales tax code. I expect that inefficiencies caused in the US by the absence of an internet sales tax are pretty second or third or fourth order compared to the gains that could be had by abolishing the home mortgage interest deduction and getting rid of the special tax status of employer-provided healthcare. Heck, getting rid of the kinds of things that make it really hard to implement a national internet sales tax would probably do at least as much good as implementing the national internet sales tax. If it’s distortionary that I can avoid taxes by ordering a book from Amazon rather than wandering over to a book-shop, how about the purely within-state distortions that have to be present when you need tax memos on ice cream?

New Zealand’s GST is remarkably clean. It’s easy to defend a very bright line on a clean tax code without any of this nonsense in it. Down the path some here wish to tread lies 1437-word memos on what counts as an ice cream cake. That’s inside-the-asylum stuff. Let’s stay outside of the asylum.