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% |
| Delaware | $208 million | $0 | - |
| 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% |
| Oregon | $1.8 billion | $0 | - |
| 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% |
| Tennessee | ? | $218.3 million | - |
| 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.
See total U.S. uncollected online sales tax by state and year >>
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.
See untaxed 2010 U.S. online retail sales by state >>
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.
{ 11 comments… read them below or add one }
To determine uncollected tax revenues, we first estimated how much each state actually did collect in sales tax in 2010. To do that, we multiplied the average sales tax rate in each state by the estimated portion of online purchases in each state (estimated based on each state’s 2009 total state and local sales tax revenues) by the portion of those purchases for which the state collected sales tax (based on merchant tax data from Extrabux.com). By subtracting that number from the total online spending in each state times each state’s average tax rate, we come up with the total online sales tax revenue that goes uncollected by each state.
So, in order to stop a clearly political problem of states spending beyond their budgets, you want to basically change the law and the way our Constitution operates so states can continue spending our money into oblivion? The State of California’s jurisdiction, for example, cannot be allowed to enforce anything on a business located in Idaho or Virginia. It’s impossible.
Who cares if states are in a crisis? Let them shut down, and its Citizens will be much better off for it.
Aren’t you legally responsible to pay use tax if purchased out of state and brought to your home state the diff in tax? Illinois, I know does it, they also are the ones forcing companies like fatwallet across the border to Wisconsin…Illinois is ridiculous – 9.75% luckily down from 10.25% sales tax is not enough…I try to buy as much as I can online bc they are bending me over everywhere else.
That’s odd. I seem to pay taxes on my online purchases these days….
Adding state sales tax to online purchases could become a win-win situation.
Online prices should be lower than brick-and-mortar retail prices. The overhead cost of storing inventory compared to maintaining a public retail space is always lower, and should be reflected in the sale price.
A lower online price would mean a smaller gross amount of money spent on sales tax. That is no real consolation to online merchants located in states with high sales tax rates, of course. If everything is done “on the books” with the merchant’s state of residency regarding sales tax, then that amount should end up benefitting the merchant when tax season happens.
Some online merchants might end up offering additional discounts equivalent to the residential state sales tax. Free shipping always feels like a plus, as well.
It could generate a future of leaner online merchants with inventories focused on craftsmanship and quality…items people cannot find anywhere else.
Well, it *could* happen…
By imposing a sales tax, it is quite a leap to assume that shopping habits would increase at the same rates under different circumstances.
Take the short sight a tad further. Let’s look at potential losses of fuel tax, surcharges and income tax revenue by those freight carriers who move all of those non-sales taxed packages to and fro across state lines on trains, planes, trucks and people carriers.
You can make almost anything ~appear~ profitable if you make assumptions and don’t carry things all the way out to an end consequence.
Actually, you’re wrong about “just type in a ZIP code and out pops a tax rate”, as the definition of what items are taxable changes on a far more granular basis than that. Some states tax clothes, some states don’t. Some *counties* exempt “work clothes” whereas all other clothes are taxed. There are innumerable special districts, levies, overlays, and ‘improvement regions’ that all interplay too.
It *is* an unfair burden on online retailers to expect them to become familiar with the vagaries of tax law for the 20,000+ pissant jurisdictions in the US AND all of the overlapping, contradictory tax laws that could apply for every single item in their catalog.
Notwithstanding THAT, the states aren’t entitled to charge sales tax on purchases that do not occur in their state, period. If they don’t like it, they should go try to amend the Constitution, where it says that taxation of interstate commerce is a right reserved for Congress. (And the USSC has agreed with this, see Quill v. North Dakota.)
In fact, the zip code is *NOT* enough to calculate sales tax. I have a zipcode from the nearest town, because that’s where the post office is that services my home. But my home is in the unincorporated county and not subject to the sales tax from that town. Some online retailers know enough to ask (Apple!) but others don’t and require a phone call.
Zip codes are for delivering mail, not for calculating taxes. If the government(s) want to allow feature creep then the need to start dividing up zipcodes to reflect taxation boundaries…
And, I forgot to add, my online habits would probably change if sales tax got tossed into the mix. Right now I have paid my annual free shipping fee to Amazon. That, plus not paying sales tax, definitely encourages me to spend more. If I had to pay 5% more for goods because of sales tax there’s no question I’d buy at least 5% less stuff.
Mostly these “initiatives” are pushed by local retailers, who would, essentially, get a slight boost in sales. But I also think that some states hope online retailers will throw in a towel and start collect maximum allowed tax. Otherwise you have to have a precise list of all regulations for each county, overlapping district, city (including city margins) etc. And if you ever saw a politician that would say “no” to some more money that can be dumped into one of those very politically profitable but practically bottomless budget holes (*cough* think of the children *cough*) take a picture and do ask what color is the sun on his/her planet
In California the sales tax i liked was 7.75% it could be lower. Then the “temporary” sales tax hike came and it was 8.75% then my city got greedy and voted themselves 1 cent sales tax increase now its about 9.75% in my city alone.
The sales tax idea is a terrible idea. Why give the state a portion of the purchase when they did nothing to earn it. Other than legal thievery. If my local brick and mortar store charges 2-10 dollars more plus sales tax. It deters me from buying the product unless its a necessity like a refrigerator or stove. California takes way too much in taxes compared to other states and wants more. When does the taxing end. Netflix gets taxed for renting movies in CA. Its not a purchase just renting. I purchased software over the internet and got taxed because the office was in CA.
Manny Pacquiao the boxer. Was set to have a fight in Los Angeles. But once his people tolled him about how california was going to take 3 million off his share. His words were “Why should I pay 3 million, When California has done nothing to earn it” Then moved the fight to Nevada. Where there is no state income tax. California lost some money and jobs that came along with the fight.
If I purchase in other states, i circulate my money in their economoy. I help create jobs in that state and i get my items for a lower price. Mom and Pops shops cant compete oh well, local store closing who cares. Besides the online store USPS, UPS and Fedex be getting my money as well. Which is still cheaper than driving and burning fuel to get low prices with sales tax.