Losing Sales Taxes

By :: November 30th, 2009

On Black Friday, the New York Times published an editorial praising a New York state law requiring on-line retailers to collect applicable state sales tax on all purchases. The requirement, in abeyance pending court challenges, makes a lot of sense. Yet history doesn’t bode well for the new law. And states are likely to continue to lose precious revenue as on-line sales grow.

Under current law, on-line retailers—as well as other remote sellers such as catalog stores—need to collect state sales tax from buyers only when the retailer has physical presence in the state (“substantial nexus” in legal terms). That’s because a 1992 U.S. Supreme Court case, Quill Corp. v. North Dakota, found that sales tax on remote sales violated the interstate commerce clause of the Constitution and unfairly burdened retailers.

In fact, the burden falls on states that lose out on billions of dollars of sales tax revenue every year. On-line sales have grown rapidly in large part because retailers charge no sales tax on buyers outside the retailer’s home state and sellers advertise that fact. Other factors may also help lower on-line prices but sales tax avoidance likely provides the biggest kick.

Unbeknownst to most shoppers, however, most states require their residents to pay “use tax” on taxable items they purchase without paying sales tax. Virginia, for example, includes an entry on its income tax return to encourage tax filers to pay their use tax. Not many do. Some years ago, the Virginia Department of Taxation told me that only about one in a thousand returns included use tax. It didn’t help that the then governor had said in a radio interview that, if he weren’t governor, he wouldn’t pay the tax. Talk about giving license to cheat the state out of taxes owed!

For years, the Multistate Tax Commission has worked to develop a “simplified sales tax system” so states could impose a uniform set of taxes on interstate sales. The idea is straightforward: a uniform sales tax would impose no additional burden on sellers beyond what they already face from their own states’ sales taxes. If such a system were adopted, the basis for Quill would disappear. Unfortunately, the commission has yet to reach consensus and there’s no simple tax.

While the commission dithers, states continue to lose out. Forrester Research has projected that on-line sales in 2009 will total $156 billion, up 11 percent from the year before. On-line holiday sales alone have more than doubled since 2003. Even in good times, states need revenue. In the current downturn, losing taxes from on-line sales has huge costs.

5Comments

  1. Anonymous  ::  6:11 am on December 1st, 2009:

    If “a uniform sales tax would impose no additional burden on sellers beyond what they already face from their own states’ sales taxes”, then why wouldn't Internet merchants choose to locate in states with no sales tax? Those states would very much appreciate the new jobs. Nationwide, it would be zero-sum, of course. More unintended consequences.

  2. Anonymous  ::  5:11 pm on December 1st, 2009:

    A move to a Value Added Tax, without an online exemption, would also help with the state parity issue, although I can see the advantages of a dual system of hidden business income taxes where rates and credits may vary along state lines (such as a child tax credit) to account for differing costs of living and spending needs. This could also include tax credits for privatizing social and educational services, where the employees could decide how the funds are distributed (some to Catholic schools, some to charter schools, some to purely public schools, etc.). This could also include another round of welfare reform, where literacy education to grade 10 replaces the current emphasis on low wage job readiness (creation of a servant class) and where associated benefits, like the same expanded child credit workers get) replace current categorical entitlements. Supplemental Security Income would also be increased, rather than having the elderly poor rely on categorical programs.

  3. Anonymous  ::  1:18 am on December 2nd, 2009:

    All the states have to do is to audit the top 10 or 20 most prominent taxpayers – actors, media, stock barrons, elected officials (senator dudd here in CT). etc.
    snag them for failure to pay and the Zoe Baird/Tim Geithner thing would look like tiny times in comparison

  4. Anonymous  ::  2:29 pm on December 10th, 2009:

    …the home of the $10 road toll and perhaps the most heavily-taxed state in the Union, and yet they always seem to be looking for new and creative ways to collect more money. This law, of course, will only encourage more people to move to neighboring states, which is how it should be.
    When will people learn that tax avoidance is not the same as tax evasion? Items purchased outside of my state are not taxable, and no taxes are “owed”; I am not “cheating” anybody out of anything.
    How swiftly we have forgotten our history: when our British masters put a tax on imported tea we started drinking domestically-grown “Labrador Tea” in protest. Then we revolted. The rest, as they say, his history.

  5. Amazon vs. sales tax « Heptanews * Entertainment * Politics * Opinions * U.S. * Technology * Health * Leisure * World * Sports  ::  6:23 pm on September 3rd, 2011:

    […] blogged about it last March, when states started proposing laws to collect internet sales tax, and back in 2009, when New York first raised the issue of Amazon paying taxes due to the presence of affiliates […]