Online Shopping Deals Hurt State Budgets

Danielle Kurtzleben

Tax loophole costs states and D.C. a large chunk of tax revenue

When the final receipts are tabulated, consumers are expected to have spent a record $1.2 billion on Cyber Monday. And, say some groups and lawmakers, state budgets will have missed out on large sums of tax dollars to which they are rightfully entitled.

Currently, 45 states and the District of Columbia levy sales taxes on shoppers at physical locations. But online-only retailers -- those without brick-and-mortar stores -- do not have to charge sales taxes in those states in which they do not have a physical presence, according to a 1992 Supreme Court ruling. According to the National Conference of State Legislatures, states will miss out on an estimated $23.3 billion in 2012 from not collecting sales tax from online and catalog sales.

Recent state budget difficulties give advocates of imposing sales taxes for online purchases one more argument. "Those states really need that money. I think the legislatures would [and] could get the work done in order to get that extra revenue," says Rachelle Bernstein, vice president and tax counsel for the National Retail Federation, one advocate for imposing sales taxes on online purchases. According to the Center on Budget and Policy Priorities, 42 states and the District of Columbia worked to close $103 billion in budget gaps for fiscal year 2012.

Some states have already taken action; Bernstein points to 24 states that have adopted the Streamlined Sales and Use Tax Agreement. This agreement simplifies sales tax collection and encourages "remote sellers" to collect taxes in those states.

Online-only retailers are a big (and growing) segment of commerce in the United States. While four of the five most-visited retailer properties on Black Friday 2011 were multichannel outlets -- Walmart, Best Buy, Target, and Apple -- Amazon came in at No. 1, with 50 percent more visitors than any other retailer, and also showed the most growth over last year's numbers, according to online analysis firm comScore.

Even on a small scale, the potential consequences of the current arrangement are apparent. An E-reader that sells on Amazon.com for $199 would fetch nearly $12 at the U.S. median sales tax rate of 6 percent in a physical store. Add up all of the E-readers, or big-ticket electronics purchases like TVs or computers, or clothing purchases made at online-only retailers like eBay and Amazon, not to mention Amazon affiliates like Zappos, and the potential tax revenues add up quickly.

Tax revenues aside, those price differences between online and physical purchases may be creating an unfair marketplace, say some retail industry advocates. "Our retail members large and small are convinced that it is making a difference. ... I've had some small retailers that will say that somebody will come in with a printout of what they can get it for online, and say, 'Will you match this price?'" says Bernstein.

However, not everyone is convinced that growth in online retail is taking business away from other outlets. "There's a tendency to think about things as a zero-sum game, but I don't think that's really the case," says Andrew Lipsman, an analyst at comScore.

The situation may soon change. Currently, three bills are circulating in Congress to force online retailers to charge sales taxes. The most recent, the Marketplace Fairness Act, was introduced in early November and has gained the backing of both Amazon and the American Booksellers Association.

Online-only retailers are, of course, operating within the tax code, which was not conceived with a burgeoning online marketplace in mind. In fact, another consequence of the current sales tax scheme is, essentially, large-scale (if unintentional) tax evasion. Many Americans are unaware that they technically do owe taxes on what they buy online, and are supposed to remit that money directly to their states.