Higher online sales mean less state tax revenues

December 27, 2012

States on average derive about 49 percent of their revenue from sales taxes, so holiday shopping results are important for state treasuries. Unfortunately, the early read on holiday retail sales looks pretty bleak. Reuters reports (emphasis mine):

As the U.S. holiday season winds down, retailers are left to hope that post-Christmas sales can help salvage their worst performance since 2008, preliminary data showed.

Holiday-related sales rose 0.7 percent from October 28 through December 24, compared with a 2 percent increase last year, according to data from MasterCard Advisors SpendingPulse.

Meanwhile, online retail sales, in which 46 states do not require the retailer to collect sales tax, surged 16 percent in the comparable period according to ComScore. There is no Christmas cheer for state treasurers in that data.

Nineteen states derive 50 percent or more their revenues from sales taxes, and eight derive over 60 percent, according to the U.S. Census:

As online sales increase, states are missing out on tax revenue. As U.S. Representative Steve Womack from Arkansas writes in U.S. News:

Currently, 46 states have sales and use taxes in statute and require individuals to report and pay them on ‘untaxed’ online purchases at year-end. In practice, this is done 0.3 percent of the time, leaving buyers exposed to potential audit issues and states shortchanged to the tune of $23 billion annually. With 42 states and countless local governments facing budgetary shortfalls this year, we must allow them to efficiently and effectively collect the revenues they are already owed. If ignored, these state and local governments will eventually be forced to raise other taxes.

Congressman Womack’s legislation H.R 3179 has 56 cosponsors and purports to level the playing field for online and brick-and-mortar retailers. Congressman Womack represents the district in which Walmart is headquartered.

There are two paths by which states can collect taxes from online transactions. First, they could enforce the laws they have on the books. Second, they could lobby for passage of federal legislation. Either way, they are currently missing out on an estimated $23 billion in state tax revenues, and this number will likely rapidly expand if brick-and-mortar sales remain flat.

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