Thinking in New Tax Boxes

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Human beings like to construct boxes, mental boxes, and put things in them. Why? Because “boxes help make the world more manageable. Every one of us constantly takes the broad variety of experiences we have and information we observe and reduces them to segments or categories, ‘boxes’ with which we try to make sense of things,” explained Boston Consulting Group authors Luc De Brabandere and Alan Lny.

For example, tax policy makers identify different types of business transactions and put each type in its own box subject to its own tax and rules for paying it.  Buy a pencil and pay a sales tax, earn income repairing copiers and pay an income tax, make jet engines and pay a business tax, stay in a hotel and pay a lodgings tax, sell your house and pay a conveyance tax, etc.

So what should policy makers do when someone comes up with a new service or a new way to deliver an existing service, say using information technology to connect someone who needs a ride with a driver that wants to provide that service? Does tax apply to sale of the IT or the transaction it facilitates? Does either transaction fit into the current sales tax box or is it something entirely new, requiring new box? (And, to show that these transactions affect other policy areas as well, do the people who provide the rides work for the people who run the electronic platform that arranges the rides or are they independent contractors?) 

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These are some of the examples of how information and communication technology are creating new businesses and jobs while challenging “existing tax and nontax rules designed with a different model in mind,” Annette Nellen identified in a recent State Tax Notes article (“The New Economy and Its Challenges,” July 27, 2015, available at the Legislative Library.) As she stated, “the new economy and its tax revenue potential and need for tax guidance cannot be ignored.”