Business technology outpaces state tax law once again

In this case, the problem is that while out-of-state sales are exempted from retail sales tax collection, the burden of proving that sales are made to persons outside the state is left to the business. For actual tangible goods, this isn't much of a chore; you have a shipping receipt of some sort, it shows a location for delivery outside of Washington, no problem. For electronic "tangible goods" this isn't as easy; the delivery address is an e-mail address. Where is a Yahoo mailbox at, anyway? How do you determine where the person is logging in from?

The whole system was clearly unsatisfactory, but it took Amazon and their significant interest in the matter to drive state legislators back to the drawing board to come up with a new "digital goods" amendment (PDF) to the retail sales tax section of state code. In many respects, the new code significantly improves definitions of what is and is not a digital good, clarifying online services, products, key codes, and downloads. This is good.

What isn't so great is that the definitions covering the determination of proof of exemption from taxation on outbound sales didn't change along with it. So you still need a bill of lading, trip sheet, or information from your freight consolidator to back you up in the matter.

It seems to me that I saw, at some point, revised definitions for digital goods based on billing information, but I don't see that it made it into the code that the Department of Revenue points you toward if you have questions on the matter (which I have linked above). Basically, that draft language stated that billing information with an address outside the state could be considered an out-of-state sale. If it made it into law, though, I can't find it.

But even if it had, it's still utterly inadequate. Revenue models are changing quickly, and in this case, my wife's company has outsourced payment processing entirely. For security purposes, she never sees any of the billing information, and the customers want it that way: with identity theft rampant, the fewer places you give your information out, the better. I have no doubt this will become more and more the case and more and more small businesses will probably find themselves driven to similar solutions, where a larger and trusted third-party handles all billing and collection, never passing the information along to salve the customers' worries.

So all she ever gets is an e-mail address, which means, technically, that she should be collecting sales tax on every sale, unable to prove (although her products are, by their very nature, destined almost entirely for overseas delivery and use) that they were made to out-of-state purchasers. This, of course, would put her at a competitive disadvantage with other businesses providing such products, and eventually probably force her out of business. How much money do you think the state will get then?

Of course, it's not going to come to that in our case. It's an ambition of ours to spend more time travelling internationally anyway. Collect the revenue outside the border, deposit it in an off-shore account, spend it in other countries, and the state government will never see a dime of tax revenue on it... and in case you haven't been keeping tabs, they're not exactly flush right now. The IRS is a little more cagey but they're not particularly out to screw us that I can see at the moment, so I don't see a problem with complying with their rules for overseas income at the moment.

It's going to get easier and easier to do this sort of thing. Off-shore bank accounts and Bahamanian shell corporations sound exotic, but in fact you can put one together over the Internet for less than a grand and with international online payment processors and hosting companies located all over the world, any small mom and pop shop in the digital goods business will soon be able to put together their very own cut-rate tax shelter overseas. Of course legislation has and will be passed to discourage this, but like jaywalking, enforceability will be problematic as incidences increase.

The thing about entrepreneurs is that they are, well, entrepreneurial. A few will be driven out of business, sure, but the rest will just look for more creative solutions to the problem the government is insisting on creating, and those solutions are ultimately going to leave the government further and further out in the cold. During the State of the Union last night, President Obama alluded to that issue with respect to legislative gridlock, pointing out that other countries aren't standing still bickering while economic conditions change, but instead making investments and clearing away obstacles to allow business to move forward. He wasn't exactly talking about the sort of problem I am outlining, but he might as well have been. As our government is faced with challenges presented by new technologies and circumstances, the best they seem to be able to come up with is to reach back into their tired, partisan, special-interest dominated toolbox and hammer out more inane and complex regulation to mire us in.

This is why, while like most people I agree with many of the sentiments Obama expresses, I distrust the mechanisms with which he hopes to implement them. Can government be a positive factor in the lives of private citizens? Sure. We forget, frequently, how much of the high standard of living and degree of comfort to which we owe our government here in the US. From food safety to building standards to emergency services, it's our taxes, attention to democratic processes, and quality of public officials both elected and appointed that keep disasters of the sort we see in Haiti, China, and Indonesia from happening here. That's worth paying for, certainly. But if big government can provide good for the public, it's a clumsy tool; a giant oaf that doesn't always know its own strength and can as easily squash us as lift us out of despair.

If legislative gridlock is hobbling the high-flying efforts of relatively big business in developing high-speed rail, clean energy, and high-technology solutions of the future, it's all happening well above the level of the small business. Even if those problems get ironed out, which they won't (at least satisfactorily), while that's happening, the rest of us are still going to get trampled in the meantime by politics as usual, and politicians whose constituencies have devolved down into the special interests with the largest pocket books, and the addictive power of large discretionary budgets.

Getting back to Blakeman's article, I see the problem as being even worse than he casts it. For Blakeman, the problem is that government, while posturing and proselytizing on the subject of job creation, is ignoring the number one creator of jobs in our economy: the under 10 person business. I agree it's certainly not helping matters, but I think actually it's far worse than indifference. It's not that the government is ignoring small business, it's that they are trampling it in their service of other masters. Small businesses don't have a voice, don't have a pocket-book to make the payoffs in the right places. But as business globalizes, more of them might realize that "the right places" no longer include the United States. I certainly plan to enjoy visiting my wife's money in the Bahamas.