- May 18, 2012
- Posted by: Seth Heyman
- Categories: Business Law, Internet Law
Unless you’re a resident of Alaska, Delaware, New Hampshire, Montana or Oregon, when you purchase an item from a local store, you expect to pay state and local sales tax. Citizens of states that impose sales taxes are required to pay them for every non-exempt purchase regardless of where the seller is located. Obviously, retailers don’t keep that money- they’re required to pass it on to the local taxing authority, which means that state governments essentially force their in-state retailers to act as their tax collectors. Businesses that fail to do so face audits and fines.
When you buy online, it’s a different story. Sales tax is only collected in connection with an online purchase if the seller maintains a presence in the buyer’s state. Until relatively recently, the lost revenues represented by out-of-state purchases were relatively small. This situation changed with the rise of infomercials and other direct-response marketing methods that facilitated purchases from out-of-state retailers, and truly began to snowball with the rise of Internet sales. Today, that lost revenue is in the billions of dollars. New Jersey alone claims to have lost $171 million from uncollected sales tax in 2009.
As of today, states can’t force out of state retailers to collect the taxes that are owed on purchases made by their citizens. Not that they didn’t try, of course. Back in 1967, the U.S. Supreme Court ruled that state sales tax systems are so complex that no retailer should have to collect sales tax for states where they have no physical presence. Facing deficits and declining revenues, state governments are now pushing Congress to enact Federal legislation forcing remote retailers to collect sales tax on behalf of distant states regardless of the complexity of their tax systems. This proposed legislation is known as the Simplified Sales Tax Project (SSTP).
The SSTP is being touted as a nationally coordinated system that would allow states to collect their lost tax revenues. In addition to lost revenues, states also argue that the sales tax issue is contributing to the decline of local mom and pop businesses, which can’t compete against those with an online presence. The other major force behind the SSTP initiative is the big box retailers, who view the issue as an unfair price advantage that smaller businesses have over them. Even though Wal-Mart has a huge online presence, it collects tax from every sale because it has a presence in every state, but smaller companies don’t have to.
However, the arguments supporting the SSTP are weak. First, the numbers don’t add up. Proponents of the SSTP cite a 2004 University of Tennessee study that blames remote retailers for over $22 billion in lost sales tax during 2005. These revenue estimates are inaccurate and inflated, because the study was conducted before Target, Best Buy, Wal-Mart, and other large retailers built up their own online operations, which now make up a huge percentage of online sales. Because these retailers have physical locations in nearly every state, sales tax is being collected on those sales. Thanks to this “brick and click” model, new estimates indicate that uncollected tax revenue over the 2008-2012 period will equal a scant .001% of total state and local tax revenues.
The argument that online retailers are contributing to the decline of local mom and pop operations, is impossible to listen to with a straight face. First, many small local businesses have an online presence, and are fully capable of competing with retailers in other states. Second, the same big-box stores that are supposedly championing the rights of their smaller cousins are the ones most responsible for putting them out of business. How many boarded up shops line Main Street, U.S.A. thanks to the nearby Wal-Mart’s low-priced Chinese goods?
Last (but not least), where’s the fairness in permitting a state to force a small store halfway across the country to serve as its tax collector? If a small store in Florida has to file 40 separate sales tax reports, and face fines and audits from states like Idaho and Hawaii for failing to do so, the administrative burden will likely drive more than a few of them off the Internet. In the end, the only parties that truly stand to gain from the imposition of the Simplified Sales Tax would be big box retailers. States won’t notice a real increase in tax revenue. Consumers, smaller retailers, and the economy as a whole will suffer.