Online Shopping: A Boon for the Consumer, a Bust for the States

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Today, the Internet is definitely a shopper’s nirvana. Just boot up your computer, and you’re a few quick clicks away from seemingly unlimited products from a multitude of vendors, at great prices. Plus, in many cases you’ll pay no sales tax, and in some cases you’ll even receive free shipping!  What more can you ask for on a cold wintery day, when there is absolutely no way you are going to put down your hot chocolate and go out shopping?

In 2012, 45 states lost a total of $23.3 billion by being prohibited from collecting sales tax from online and catalog purchases. The remaining five states — New Hampshire, Delaware, Montana, Oregon, and Alaska — have no sales tax, so for them this is not an issue. But the opposite holds true for states with no personal income tax, where sales tax revenues are critical for meeting budgetary obligations. One of those states, Florida, lost an estimated $1.4 billion in potential sales tax revenues.

California and New York, two states cited in Travis H. Brown’s How Money Walks, have already lost more than $90 billion in adjusted gross income thanks largely to their high tax regimes. These two states have been “short-changed” an estimated $6 billion in sales tax revenue through online retail sales in just the past year!

Because of a 1992 U.S. Supreme Court decision, Quill Corp v. North Dakota, retailers are exempted from collecting sales taxes in places where they have no physical presence, such as a store, office, or warehouse. While that specific ruling had to do with a catalog mail order company, it has been applied to all remote sellers, including today’s online retailers. The high court saw that it would be virtually impossible for these retailers to keep track of all the different sales tax rules and rates of each state, plus the local taxing jurisdictions within them. They felt it would bring commerce to a grinding halt. But, they also went on to say that Congress does have the constitutional authority to change this policy through legislation at a later date.

Sponsored by Senator Mike Enzi (R-Wyoming) in January 2013, the Marketplace Fairness Act would allow states, provided they have met certain conditions, to require large Internet and mail-order retailers to collect state and local sales taxes. To exercise the authority under this act, a state must adopt legislation implementing the provisions of the Streamlined Sales and Use Tax Agreement, which requires them to adhere to uniform definitions, filing requirements, and other rules regarding sales tax collection, or meet five other sales-tax-simplification measures outlined in the act. Twenty-four states already have complied with the Streamlined Sales and Use Tax Agreement, which enables volunteer sellers, both online and catalog, to collect sales taxes for the appropriate states, based on the origin of the order. Twenty more states are working towards compliance. Many larger online retailers are beginning to fall in line.

So when you go online to buy your copy of How Money Walks, you will find that one part of that perfect Internet experience is slowly drifting away: namely, the free ride on sales taxes. But, come to think of it, there really aren’t many free rides left!