Strapped states crave bigger online tax bite

Thu Sep 29, 2011 8:10am EDT

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(Reuters) - With holiday shopping season near and billions of dollars in sales tax at stake, financially strapped state and local governments are pushing to collect more tax on online purchases, but real progress will require action in Washington where political gridlock prevails.

Recent efforts by California made headlines nationwide when, one of the world's largest online retailers, agreed to begin collecting taxes on sales in that state as early as next September.

The state, which faced a $25 billion budget deficit at the beginning of the year, is estimated to be losing $1.7 billion annually in uncollected online sales taxes. (Link to 2009 University of Tennessee study, here)

Sales over the web are the fastest growing area of retailing and states are anxious to up their share. Deloitte LLP projects that this holiday season, retail sales overall will grow up 3 percent, but 14 percent online. Goldman Sachs has estimated that online shopping will jump from less than 10 percent of retail sales to over 17 percent by 2020.

Under a Supreme Court decision now almost 20 years old, any national framework for collecting tax on remote sales would have to come from Congress.

Until that happens, states can only seek sales taxes from companies with a physical operation in their state, leaving many sales to fall through the cracks. Amazon has facilities in California and other states which have pushed the online retailer to collect taxes on sales shipped to their residents.

"We need help at the national level," says Mick Cornett, mayor of Oklahoma City, Oklahoma. He has lobbied extensively for federal action. "There's a limit to what we can do."

Proponents of federal action say the current situation is unfair to local merchants who must collect sales tax.

But it's another side of the issue -- the revenue loss to states and cities in uncollected taxes -- that has fueled action on the state level. Besides California, the states of New York, Texas, Illinois and others have recently approved laws aimed at collecting more sales tax on ecommerce.


Progress on the issue has been slow in Washington, where anything with even a whiff of tax increase struggles. A bill introduced in late July by Democratic Senator Dick Durbin had five co-sponsors, none Republican. Bipartisan support will be necessary for even a chance of passage.

On the state level, though, financial pressures seem to have erased partisan division on the issue. Texas' majority Republican legislature passed its legislation, and California's measure had support from both parties.

Hoping to bring that cooperation and a sense of urgency on the issue to Washington, local businesspeople, mayors and other officials from states have been lobbying on Capitol Hill.

Danny Diaz, spokesman for the Alliance for Main Street Fairness, which has been pushing for a federal structure, estimates that between 150 and 200 members of Congress come from states which have recently taken action and would see hometown support for a federal solution.

Oklahoma City's Mayor Cornett, a Republican, has lobbied lawmakers on the issue and raised it in a meeting with President Barack Obama.

Cornett says the $10 to $15 million a year his city loses on uncollected taxes equates to between 100 and 150 firefighters or police. He says he's making progress arguing that these are taxes already owed, not new taxes.

"Now you find conservatives in Washington who understand this is closing a loophole, it's not a new tax," says Cornett.

"Most cities are just hanging on, trying to keep the firefighters and police on the street. This is one way Congress can help local governments without it costing them anything."

Nationally, the cost of running local government is rising faster than tax revenue. Sinking property values are hurting real estate tax collections. Stagnant salaries have kept income tax flat in the states which impose one.

Oklahoma's cities rely on sales taxes for 55 percent of their budget on average. In some places, sales tax covers more than 90 percent of the local budget.

Arkansas municipalities rely on it heavily too, for close to 50 percent of their income from sales taxes. Slack receipts have driven 15 Arkansas cities to institute sales tax increases so far this year, according to the Arkansas Municipal League.

Texas Comptroller Susan Combs calculates that in fiscal 2010, which ended August 31, her state lost $658 million in uncollected sales taxes. Sales tax contributes 55 percent of the state's total income.

(Reporting by Nanette Byrnes in Chapel Hill, NC; additional reporting by Patrick Temple West in Washington; Editing by Kevin Drawbaugh and Chizu Nomiyama)

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Comments (4)
Sales tax for physical sales is based on the location of the merchant I buy from. If I travel to AZ from CA, I don’t pay CA sales tax. So when I buy from AZ, on the internet, the sale is actually made in AZ not CA—the order is taken there, the goods shipped from there, and I contact customer service there if I have a problem. CA has not right to require I pay CA sales tax any more than they do if I drive to AZ and buy. I should pay AZ tax if anything at all. States need to live within their means instead looking for more pockets to pick. Like crack addicts who steal from others to support their habit and increase stealing when the habit grows, States would rather find new sources of other people’s money to garnish than cut back on their addiction to spending.

Sep 29, 2011 9:34am EDT  --  Report as abuse
DGFlyGirl wrote:
It’s about time! I don’t care where you live – if you purchase a product online as opposed to in a local store, that online retailer, through their shipping company, relies on local services to ensure that their product makes it to the purchaser.

I would be opposed to a federal VAT because I see the wasteful spending at the federal level, but in my state and in my city, you can easily access their budgets and see just how strapped for funds these communities really are.

Advocatusdiabol claims that states are “addicted to spending”, and that might be the case. However, that “addiction” funds education, road maintenance, and public safety.

Advocatusdiabol is also forgetting that this is a tax that you are ALREADY supposed to pay. If you purchase items online, you are supposed to claim those purchases and pay your use tax on your state income tax forms. Very few of us actually do that. I would much rather have these businesses collect on my behalf than to have to worry about making sure I am remitting enough tax.

Sep 29, 2011 3:42pm EDT  --  Report as abuse
jakej wrote:
Companies are fighting this because of the insane compliance burden not the tax. the customers are the ones paying the tax. In WA, the local tax rates can change quarterly and the jurisdictions cut across zip codes and also change quarterly. asking national companies, espically the small ones, to keep track of that for all 50 states is rediculous. If the states proposed a central remitance hub, with a single tax form and did something about the tax jurisdiction insanity they would have alot less resistance.

Sep 30, 2011 1:09pm EDT  --  Report as abuse
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