Document Type

Article

Disciplines

International Law

Abstract

Retail sales taxes (RSTs) and value-added taxes (VATs), if properly coordinated, are eminently suitable for being administered by middle-level governments, in either single or common markets. The experience in the United States and the European Union attests to this fact. In the United States, forty-five states and the District of Columbia have their own RST. Although the kind of tax is the same, tax bases and rates differ widely from one state to another. Interstate cooperation is required to collect the tax on out-of-state purchases. In the European Union, all member states have a VAT. The tax base is largely harmonized, but rate structures vary. Tax adjustments through books of account ensure that the VATs do not interfere with intra-union trade. These adjustments create a situation which resembles the situation in the United States. In due course, comparable arrangements will also have to be worked out between the United States, Canada, and Mexico in the framework of the North American Free Trade Agreement (NAFTA).

This Article surveys and evaluates the principles, criteria, and practices that govern the coordination of VATs and RSTs among tax-autonomous jurisdictions, whether they be provinces, states, members of a common market, or nation-states. It begins by defining the two principles that govern the taxation of goods and services which enter the trade between tax-autonomous jurisdictions: the "destination principle" (imports taxed; exports exempt) and the "origin principle" (exports taxed; imports exempt). Next, three main considerations are brought to bear on the choice between these two principles, namely "interjurisdictional equity" (who should collect and keep the revenue from the sales tax), "locational neutrality" (how can this be done without distorting the location of manufacturing), and "administrative feasibility" (what is the simplest method to achieve these goals). The destination principle emerges as the preferred choice for coordinating sales taxes among different units of government. In the following section, the practical implications of this principle are examined separately for the European Union and the United States. A concluding section sums up the Article's main findings.

Before proceeding with the analysis, however, a few concepts should be clarified. Goods which are traded between tax autonomous jurisdictions, not necessarily nation-states, are called exports and imports. The most common approach to the treatment of these goods is to free them from sales tax, whether VAT or RST, upon leaving the taxing jurisdiction and to subject them to sales tax upon entering the taxing jurisdiction. The adjustments that are then required are called "border tax adjustments." Border tax adjustments differ from "border taxes," such as import duties and export duties, which are imposed only on goods crossing interjurisdictional frontiers. Between nation-states, border tax adjustments, like border taxes, are commonly administered through "border controls," that is, customs posts stationed at national frontiers. These arrangements apply to VATs and RSTs, as well as other forms of sales tax, such as manufacturers' taxes, wholesale taxes, and cumulative turnover taxes.

To define the various political and economic settings somewhat more closely, a nation-state is understood to be an entity that can pursue independent economic policies. Subject to international agreements and the possibility of retaliation, a nation-state may not be overly concerned with interjurisdictional equity and locational neutrality, the exchange rate is flexible, and there are border controls to effect border tax adjustments. In a common market, such as the European Union, member states do care about competitive distortions, in principle the exchange rate is fixed, and there are no border controls. In a federal system, such as in the United States, the states cannot pursue their own economic policies but have substantial independence in the tax field, border controls are not permitted, but border tax adjustments are allowed. It will be noted that there is a close parallel between the existing United States system and the European Union setting. As will be seen, however, the kinds of sales tax - RSTs in the United States and VATs in the European Union - call for different coordination arrangements.

The scope of this article is confined to VATs and RSTs because only these sales taxes can ensure neutral treatment of interjurisdictionally traded goods in relation to intrajurisdictionally produced goods. As is wellknown, a cumulative turnover tax is intractable and non-neutral in its effects on intra- and interjurisdictional trade. Neither the amount of the export rebate nor the amount of the compensatory import tax can be ascertained with reasonable certainty. A manufacturers tax, imposed by subordinate levels of government, must be levied on an origin basis in a federal type of country. Hence, producing jurisdictions are able to export the tax, an outcome that is regarded as so undesirable that manufacturers' taxes are almost always levied by central governments. Similarly, wholesale taxes cannot be administered at the level of subordinate governments.

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