Contrary to folk wisdom, taxes are not quite certain, at least when it comes to state sales taxes on online transactions. Despite perennial efforts by budget-strapped legislatures, billions of dollars in taxes on e-commerce transactions go uncollected every year. Now, however, a coalition of state tax collectors and brick-and-mortar retailers are ramping up pressure—and the end of tax-free online shopping may be nearing.
Estimates place the amount at stake from $4 billion to $23 billion, depending on the source. The lower one comes from NetChoice, a coalition of online businesses based in Washington, D.C., that opposes any federal effort to expand sales tax collections. The higher is supplied by the National Conference of State Legislatures, a Washington, D.C., group that advocates for states’ interests and wants more taxes collected.
A more moderate projection of $11.4 billion in uncollected Internet sales taxes for 2012 was calculated in 2009 by Donald Bruce, an economics professor at The University of Tennessee in Knoxville. “We try to be conservative with these estimates,” Bruce says. “We don’t want to oversell this.”
Whatever the exact amount, the idea that billions of dollars are going uncollected is an easy sell. It’s also clear that most e-commerce businesses already collect taxes. Last year, Bruce estimates states reaped $34.5 billion of about $45.9 billion due. “That tells you a pretty good chunk of this is being collected,” he says.
Still, controversy over unpaid e-commerce sales tax rages, with online businesses and their advocates squaring off against an alliance of brick-and-mortar retailers and tax officials. Representing retailers who sell from physical stores, the Washington. D.C.-based National Retail Federation is lobbying for a federal law requiring sales taxes be paid.
A concern for fairness drives them, according to David French, senior vice president of the NRF. “In effect, the online retailer is sometimes enjoying a price advantage that can be as much as 10 percent on some items,” he says. “That has an impact on brick-and-mortar retailers in some sectors of the economy.” The retailer most likely to feel it sell costly commodity-type products like consumer electronics, so that a 10 percent price differential looks significant to budget-conscious consumers, French says.
Few consumers are conscious of the fact that state use taxes generally require them to pay sales tax if retailers don’t collect it. Use tax enforcement is low, however, because transactions are hard to track and collecting from consumers is harder still, Bruce says. It’s easier for taxing authorities if online sellers do the collecting as they do in traditional retail environments.
Online sellers have operated in a gray area outlined by a 1992 Supreme Court decision that exempted sellers from sales taxes unless they had a physical presence in the state. At the time, the ruling affected only telephone and mail order sale. When e-commerce emerged, the rationale was extended online.
Since then, e-commerce has grown rapidly. Online selling grew 12 percent in 2011, while traditional retail grew less than 5 percent, French says. The proliferation and prosperity of online sellers, together with state budget crunches, is causing the issue to get a second look.
Online sellers don’t like that. NetChoice argues that the costs on small businesses of collecting sales taxes might outweigh the financial advantages to states. However, Bruce notes, it’s possibly more significant that not having to pay sales taxes gives online retailers a small but potentially significant advantage over physical retailers.
Online sellers also say the variety of taxes levied by state and local authorities make it too complex and costly for small retailers to comply. However, Bruce scoffs at that argument, saying technology to automatically figure sales taxes is both available and affordable.
Most large online retailers already routinely figure and collect sales taxes. They have to, Bruce notes, because most have physical presences in most states. E-commerce titan Amazon lacks retail stores and has opposed online sales tax collection efforts. But some observers expect it to turn the situation to advantage by collecting taxes and charging for the service to the thousands of small retailers who use its marketplace. That could make collecting easier for small retailers, reducing their chances of running afoul of tax authorities and leveling the playing field, something all parties claim to want.
Congress, not Amazon, is where many expect field-leveling to occur. A current proposal would streamline sales taxes according to a national scheme, grant amnesty to those who failed to collect it and reimburse those who do for their costs. The proposal exempts sellers with less than $500,000 in annual revenues from collecting, addressing one criticism that the job is too burdensome for small firms. That proposal, however, is unlikely to pass during an election year.
Whether from Congress or elsewhere, pressure to tax online transactions is likely impossible to stop, Bruce says. There’s too much money at stake, and too many people who want to see it collected. “Eventually,” he says, “there is a 100 percent chance that something will happen.”
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Mark Henricks is an independent business writer, covering business, technology, personal finance and other topics. His reporting has appeared in The Wall Street Journal, The Washington Post and many other leading publications.
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