Online Sales Tax Push Continues Despite Disappointing Returns

State officials have viewed Internet commerce with dollar signs in their eyes for decades. The few that have managed to tap the spigot of online sales in a substantive way, however, aren't reaping the promised rewards. But that's not stopping Congress from trying to open up e-commerce as a potential revenue source for all states.
A 2009 University of Tennessee study estimated that states would lose $11.4 billion in revenue in 2012 if they failed to collect more taxes from online sales. California's loss alone, according to the study, widely cited by those pushing for the power to tax the Internet, would be $1.9 billion. 
The reality in the Golden State has fallen far short of that expectation. The state is one of the few in the nation that has passed affiliate nexus legislation - the so-called "Amazon tax" - requiring out-of-state retailers with in-state affiliates to collect and remit sales tax on online purchases made by state residents. Last month the state's Board of Equalization reported that in its first full quarter of collections, which included last year's busy holiday shopping season, it took in $96.4 million, a much-needed boost to the state's bottom line to be sure, but nowhere near the $457 million quarter implied by the Tennessee study. 
In New York, another affiliate-nexus state, online retailers had remitted $360 million in sales taxes on over $4 billion in taxable online sales as of February 2012, according to the state's Department of Taxation and Finance. While that figure represents about 90 percent of all taxable online sales in the state, it is also well below the $2.5 billion the Tennessee study predicted. 
"To the extent the estimates being used are overstating reality, and I think they are, it is not solving anyone's deficit problem," said Navigant Economics Managing Director and Principal Jeff Eisenach, who co-authored a study that pegged the national online sales tax potential at $3.9 billion, about a third of the Tennessee study's estimate. 
Professor William Fox, the lead author of the Tennessee study, said one reason states have fallen short of his estimates may be that smaller online retailers are often exempt from collection. The National Conference of State Legislatures said major online retailers like and have also terminated their affiliate arrangements, not only making the out-of-state retailers exempt from the affiliate nexus laws but also reducing the income of the taxable in-state affiliates. 
The moderating revenue outlook hasn't stopped the push for e-commerce taxation, however. In fact, last month 53 members of Congress reintroduced legislation that would give states the authority to require online retailers to collect sales tax, an idea that has languished on the Hill for years. Amazon, which has already agreed to collect sales taxes in nine states and is expected to do so in at least six more in the next few years (see Bird's eye view), also supports the federal bill, known as the Marketplace Fairness Act. 
One reason for the continuing impetus on the issue is the lack of a level playing field between online retailers and brick-and-mortar stores. 
"It's about states' rights, it's about fairness," said U.S. Sen. Mike Enzi (R-Wyoming), a lead sponsor of the bill. 
U.S. Rep. Steve Womack (R-Arkansas), home to the country's largest brick-and-mortar retailer, Wal-Mart, said the lost local revenue resulting from that imbalance is hurting state and local governments. 
"It affects everybody," he said at a news conference for the Marketplace Fairness Act. "It affects schools. It affects policemen, it affects firemen, it affects anybody engaged in public service." 
E-commerce is also where the growth is. It has been growing at a faster rate than traditional retail for years, and Deloitte Consulting has estimated that by 2015, $175 billion a year will have shifted online from stores. (REUTERS, UNIVERSITY OF TENNESSEE, BUSINESSWEEK, NATIONAL CONFERENCE OF STATE LEGISLATURES, ARIZONA REPUBLIC, CNNMONEY, WALL STREET JOURNAL)

- Compiled by Korey Clark

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