Last month’s post about the best and worst states for online shopping sparked a spirited discussion about online sales tax. It also sparked a question: What would be the real effect of taxing all online sales? We used data from Extrabux.com to answer this question and shed some light on the ongoing battle over Internet sales tax.
The only time you’re required to pay sales tax on an online order at the time of purchase is when the online retailer you’re buying from has a physical presence in your state, such as a warehouse, store or office. With states facing a 2012 budget deficit of $112 billion, some are now expanding the definition of physical presence and collecting taxes on more online sales. How much in uncollected tax revenue is on the table?
If every state imposed a tax on all online sales, they would receive an additional $10 billion in revenues per year. That would reduce the average state’s budget deficit by 17%.
|State||FY2012 Budget Deficit||FY2012 Uncollected Online Sales Tax||Budget Deficit Reduction|
|Alabama||$979 million||$153.8 million||15.7%|
|Arizona||$974 million||$227.9 million||23.4%|
|California||$25.4 billion||$1.4 billion||5.5%|
|Colorado||$988 million||$121.7 million||12.3%|
|Connecticut||$3.2 billion||$170.7 million||5.3%|
|Florida||$3.6 billion||$450.2 million||12.5%|
|Georgia||$1.3 billion||$237.7 million||18.3%|
|Hawaii||$410 million||$47.6 million||11.6%|
|Idaho||$92 million||$44.6 million||48.4%|
|Illinois||$4.9 billion||$422.0 million||8.6%|
|Indiana||$270 million||$230.3 million||85.3%|
|Iowa||$186 million||$113.2 million||60.9%|
|Kansas||$492 million||$121.1 million||24.6%|
|Kentucky||$780 million||$126.1 million||16.2%|
|Louisiana||$1.6 billion||$197.7 million||12.4%|
|Maine||$436 million||$40.4 million||9.3%|
|Maryland||$1.4 billion||$205.3 million||14.7%|
|Massachusetts||$1.8 billion||$261.7 million||14.5%|
|Michigan||$1.3 billion||$252.0 million||19.4%|
|Minnesota||$3.8 billion||$265.2 million||7.0%|
|Mississippi||$634 million||$122.9 million||19.4%|
|Missouri||$704 million||$36.8 million||5.2%|
|Nebraska||$314 million||$57.2 million||18.2%|
|Nevada||$1.5 billion||$94.0 million||6.3%|
|New Jersey||$10.5 billion||$378.0 million||3.6%|
|New Mexico||$450 million||$76.6 million||17.0%|
|New York||$10.0 billion||$902.5 million||9.0%|
|North Carolina||$2.4 billion||$349.7 million||14.6%|
|North Dakota||?||$32.3 million||-|
|Ohio||$3.0 billion||$343.6 million||11.5%|
|Oklahoma||$500 million||$157.7 million||31.5%|
|Pennsylvania||$4.2 billion||$384.5 million||9.2%|
|Rhode Island||$331 million||$42.3 million||12.8%|
|South Carolina||$877 million||$115.6 million||13.2%|
|South Dakota||$127 million||$16.8 million||13.3%|
|Texas||$13.4 billion||$673.9 million||5.0%|
|Utah||$390 million||$79.4 million||20.4%|
|Vermont||$176 million||$36.3 million||20.6%|
|Virginia||$2.0 billion||$169.4 million||8.5%|
|Washington||$2.5 billion||$294.1 million||11.8%|
|Wisconsin||$1.8 billion||$172.7 million||9.6%|
In the upcoming Fiscal Year 2012 (for most states, that’s July 1, 2011 – June 30, 2012) 31 of the 44 states that face a budget deficit could reduce their budget shortfall by 9% or more by collecting sales tax on all online purchases made by their residents. Indiana and Iowa could close more than half of their budget deficits, and the six states with balanced budgets would run a combined $500 million surplus.
As online sales continue to grow, so too will uncollected sales taxes. The graph below shows uncollected sales tax by year (January – December). In 2015, over $15 billion in sales tax will go uncollected under the current sales tax legislation.
We can also estimate the total amount of untaxed online sales last year by dividing each state’s uncollected tax amount by its average tax rate.
Online consumers enjoyed over $118 billion in tax-free shopping last year, which accounted for about two-thirds of total online sales.
The only time you’re required to pay sales tax on an online order is when the online retailer you’re buying from has a physical presence in your state; however, New York, North Carolina, Rhode Island, Illinois and now Arkansas, drooling over the numbers above, have expanded their definition of “physical presence” to also include a retailer’s affiliates—including websites like Extrabux.com that market retailers’ products and services. As a result, many retailers are forced to collect sales tax from residents in those five states. Some retailers, such as Amazon and Overstock.com, refuse to work with affiliates located in these states in order to avoid charging sales tax to online shoppers residing there. In turn, many large affiliates originally located in New York, North Carolina, Rhode Island, Illinois or Arkansas have moved their businesses to a neighboring state.
Without action at the national level, states will continue to pass legislation that allows them to collect more online sales tax and expand the definition of physical presence. There will be more contention between online retailers and the states, more affiliates will be forced to relocate, and savvy consumers will simply buy from online retailers that don’t charge sales tax in their state.
The current laws governing Internet sales tax collection were put in place before online shopping existed. In 1992 the Supreme Court ruled that businesses are exempt from collecting sales tax in states where they have no physical presence. Although that case dealt with catalog mail-order companies, the ruling has subsequently been applied to all remote sellers, including online retailers. At the time, mail-order companies argued it would be too complicated to keep track of the different sales tax rules and rates around the country. And the Court agreed, saying that it would burden interstate commerce.
But times have changed.
We live in a digital world where software has eliminated the difficulty of calculating and remitting sales tax. All you need is a zip code and any online retailer can tell you exactly how much tax you’ll pay. In its 1992 ruling, the Court specifically noted that Congress had the authority to change this policy and could enact legislation requiring all retailers to collect sales taxes. That time may be now.
I buy everything online through Extrabux.com and never pay close to full price. Without leaving my chair, I can find comprehensive product details and reviews, compare prices from thousands of retailers, and get cash back and coupons. Frugal online shoppers like me are the reason many local stores are closing down. Are my shopping habits fair or right? I don’t know, but they sure have saved me a lot of money.
I’ve enjoyed this endless tax holiday as much as anyone, ever since I made my first online purchase on eBay over ten years ago. But all good things come to an end.