RALEIGH – Who pays sales taxes in North Carolina?
If you think the answer is obvious, think again. Yes, if you buy a taxable good or service in the state, you will typically receive a bill, invoice, or verbal report from your vendor that specifies how much of your bill is sales tax.
And yes, the sales and use tax generates a lot of revenue in North Carolina – about $5.7 billion at the state level and billions more to counties and municipalities. That revenue must come from somewhere. In fact, it comes primarily out of the pockets of North Carolinians, although some visitors, tourists, and out-of-state company owners or employees bear some of the incidence of the tax.
But as far as who is legally responsible for paying the sales tax to the government, the answer is typically the seller, not the buyer. Unless a North Carolinian is buying goods from an out-of-state vendor for storage or use within the state – via Internet or catalog, for example – the seller is responsible for remitting sales tax to the state on a timely basis.
If you buy from a storefront retailer, in other words, once you have paid the total bill, you are done. The government gets its money from the retailer. If it doesn’t, the retailer is on the hook, not you.
The question of who pays the sales tax is hardly an academic one. Much of the debate about tax reform in North Carolina centers on the sales tax, and much of the sales-tax debate centers on increasing the collection of sales tax from those not currently collecting it – from consumers who don’t voluntarily report and pay tax on their online purchases and from service industries that aren’t currently required to collect and remit sales taxes on their gross receipts.
My own view, often expressed, is that the state sales tax is an inherently rickety structure for taxation in a 21st century economy. Rather than trying to fix it through base-broadening measures, I’d phase it out in favor of a consumed-income tax collected directly from households on an annual basis.
But as I don’t see a practical alternative for the local share of the sales tax, and the state tax will likely persist for years anyway, there remains the question of how best to administer a sales tax. A case now in North Carolina business court offers the prospect of clarifying the law when it comes to unpaid bills.
Home Depot has been asking North Carolina and other states to refund millions of dollars in sales tax it says it paid on behalf of consumers who used Home Depot-issued credit cards for their purchases but then failed to pay their cards off. Not surprisingly, North Carolina and other states have said no.
As the Triangle Business Journal reports, Home Depot says it is unfair for the state to hold onto “retailer sales tax payments even though the customer never paid the tax and the retailer therefore ultimately owed no tax.”
What makes the case even muddier is that Home Depot, like most retailers, doesn’t actually administer the accounts of those who hold Home Depot credit cards. It contracts with a finance company to do that. The state is arguing that because a third party owns the uncollected debt, rather than Home Depot, the latter isn’t entitled to a sales-tax refund.
The distinction doesn’t really resolve the matter in my mind, at least not conceptually. Many people buy goods or services with credit cards and then renege on those debts, sometimes years after the fact. It seems impossible to me to have states chase down who bought what and how much of the debt was paid off, levying a sales tax on the paid amount and refunding the tax on the unpaid amount either to retailers or credit-card companies.
Because most sales taxation puts the liability on sellers, not buyers, it will always be an indirect and, in my opinion, an inferior way to collect revenue for the government. I prefer to present citizens with a bill and require their direct payment.
I know direct taxation is more infuriating. That’s a feature, not a bug.
Hood is president of the John Locke Foundation.