TAXDAI
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TAXDAI

The home of tax-avoidance?

This way to savings…

The sign says it all.

Beyond informing you that your location is changing, there is some history, an outline representing the shape of the state, and a self-deprecating slogan about the states’ diminutive footprint. Oh yeah, they added a sign inviting you to “screw” the state where you live out of tax revenue.

C’mon…admit it. That’s a pretty sexy pick-up line. Rarely is the government so “up for it”, if you get my drift. They're ready and willing to engage in some extracurricular activities…just be sure to pay the tab in Delaware.

The worst part of the tryst: they encouraged the dalliance knowing you’re married.

If this is all a bit too cryptic, maybe an example would help.

Robbins 8th & Walnut

If you spent time in and around Philadelphia in the 1980’s and 90’s, you likely encountered advertising for Robbins Jewelers. As the header suggests, they were located at the corner of 8th and Walnut streets, which locals know (and the commercials reminded us) is the “heart of jewelers row.” The location of the store was part of the brand.

The real Jerry is on the left

Founded in 1949, second-generation owner Jerry Robbins was a constant in the advertising campaigns, making himself a local celebrity in the process. Known for having a diamond in his beard, as Jerry’s fame grew Robbins expanded from the single store to five locations across the Philadelphia region. Of interest for this discussion: Robbins Delaware Diamonds. The existence of a Delaware location was a prominent feature, with commercials reminding everyone that Delaware is the “home of tax free shopping.” It’s how I (and likely millions of others) learned that Delaware had no sales tax. For a significant purchase like jewelry, it makes sense to drive less than an hour to save hundreds (or possibly thousands) of dollars.

Robbins Delaware Diamonds has survived until this spring, when they recently announced the closure of their final storefront. If there was ever any doubt about the importance of “tax free shopping,” the following ad might help remind you that there is still be time to hurry on down and pick something up… sans tax.

And you know…it’s all tax free!

So what’s wrong with saving money?

Nearly all states in the U.S. charge sales or use tax on the purchase of tangible personal property (TPP). Sales and use tax are the same thing, only sales tax you pay to the seller (who pays the state), and use tax you pay directly to the state. What is TPP? Loosely defined it is stuff you buy that can be moved for personal use. Cars, furniture, laptops, and of course, diamonds.

Unless you’re from Delaware or one of the other 4 states without a sales tax, when you buy TPP you likely owe your state of residence tax based on the value of the item(s) purchased. Since most states have a sales tax, the seller usually collects the taxes at checkout. If you pay sales tax in a state where you purchase TPP and don’t live, you will receive a credit up to the amount you owe to your home state.

When you don’t live in Delaware and you buy there, you almost definitely owe use tax to your home state. Delaware knows this. Residents of Delaware’s three neighboring states (MD, NJ, PA) owe somewhere between 6% and 8% (depending on their address). The suggestion that Delaware is “tax-free” is at best misleading; at worst, they are complicit in tax evasion.

The impact of online shopping

Traditional “brick-and-mortar” retail continues to shrink, but there are signs in the jewelry business that touching and seeing large purchases before buying is a trip worth making. As we transition “back to normal” following the pandemic, there are several stories of retail jewelry store openings. If large purchases remain largely in-person, the tax avoidance opportunities available in Delaware (and other no-tax / low-tax states) remain viable.

As online commerce expands, so have the compliance and reporting issues associated with sales tax. The rapid implementation by states of economic nexus rules following the Wayfair decision (2018) now require previously exempt sellers to withhold sales tax based on the buyer’s location. It’s complicated and time-consuming. Beyond the retailers burdened by the new regulations; intermediaries including wholesalers and drop-shippers are impacted. Staying with diamonds, James Allen, Blue Nile, and other online sellers have had their compliance requirements grow exponentially. There remain sellers who do not meet the economic nexus requirements, but they are fewer each year.

How do we simplify?

The primary issue above, be it related to buying in Delaware or online, is how do sales and use tax systems evolve to ensure compliance while reducing the effort required to do so? The systems and processes are struggling to ingest the volume and diversity of those now involved in compliance. There has to be a better way.

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Ron Giordano

Ron Giordano

Thirty years ago a macro and WYSIWIG in Lotus 1–2–3 started all this…