Critics argue that the current system for taxing crossborder sales--through the Internet, mail order, or other means--poses problems for the international and national consumption tax system. In Sell Globally, Tax Locally: Sales Tax Reform for the New Economy, a new AEI Press publication available in early October, AEI scholar Michael S. Greve proposes that the system be reformed to tax crossborder sales based on their origin rather than their destination. A September 5 event also focused on Greve’s recommendations.

The current system levies taxes based on destination. Government and intergovernmental institutions, as well as industries threatened by the growing e-commerce sector, want to keep this destination-based method in place, as well as harmonize and simplify each destination’s tax. Although national and international harmonization efforts will have a slight positive effect, these mechanisms will not be as equitable as supporters believe, Greve argues. He contends that destination-based taxation is an “unworkable” system.

Under the destination-based system, collecting consumption taxes from Internet purchasers proves difficult. It forces the burden upon the seller, resulting in large compliance costs. “Even with the best intentions,” Greve writes, “companies find it inordinately difficult to determine their tax remittance obligations in thousands of jurisdictions with different and constantly changing tax rates, definitions, and reporting requirements. . . . An origin-based system can reduce these costs.”

Destination-based taxation operates well enough in stores because the transaction takes place at a physical location where taxation can be easily enforced. Even Internet sales from companies like Amazon can handle a destination tax, as long as a physical product is sent to a buyer at a specific location.

Under the current system, however, the sale of Internet services such as online editing remains murky because a physical product is not sent to any given location. This drawback allows select Internet services the opportunity to escape taxation and, says Greve, gives an unfair advantage to those Internet retailers.

On the other hand, Greve asserts, origin-based taxation limits the coercive reach of each jurisdiction to its own citizens and businesses. Destination-based taxation, in contrast, reaches across borders and requires intergovernmental agreement to facilitate such mutual transgressions. “We should be loath to pay that price--the direct and unavoidable cost of destination-based taxation--even if destination-based taxes could otherwise be shown to be efficient in some technical sense,” Greve writes.

Peter R. Merrill of PricewaterhouseCoopers, a panelist at the event, expressed reluctance to establish a potentially inefficient origin-based system. He recommended instead that the current system could be modernized through the use of increased technology. In his paper, Greve responds to criticisms such as Merrill’s: “Suppose that origin-based sales taxation can be shown to be inefficient in a strict economic sense. No economist would defend the existing destination-based system as efficient in that same strict sense. For institutional reasons, it is unlikely that extant harmonization proposals will create or even approximate a (technically) efficient destination-based system.”

Daniel Shaviro of the New York University School of Law, another event participant, concurred with Greve: “Destination-based taxation still requires monitoring sales by outside  businesses to residents, [so  origin-based taxation] looks a lot simpler.”

Greve concluded both at the event and in his study: “Let’s scrap the whole system and pick one that minimizes transaction and efficiency costs. . . . The notion that origin-based taxation should be off the table for no other reason than it is not revenue-neutral or enhancing [is] a presumption.”