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Saturday, May 2, 2009

E-commerce and uncollected use tax

The Streamlined Sales Tax Project website includes a report dated 4/13/09 by Professors Bruce, Fox and Luna entitled State and Local Government Sales Tax Revenue Losses from Electronic Commerce. This continues work they have undertaken over many years to estimate and track revenue losses of the states due to uncollected use tax on e-commerce transactions. They track this for both B to C and B to B transactions.

In addition to the revenue loss, they note additional problems that result from the current tax system challenges of collecting sales and use tax from remote vendors (the e-commerce business model makes it easier to be a remote vendor because you don't need many physical locations in order to sell worldwide). The problems they note are:
  • Vendors can arrange their selling and warehousing activities to limit nexus and sales tax collection obligations.
  • Main street retailers are at a disadvantage as some customers will browse there and then make their purchase online to avoid the sales tax.
  • Distributional equity issues exist in that low-income customers are more likely to buy on Main Street and pay sales tax than buy online and potentially avoid sales tax.
The authors estimate in the baseline case that "annual national state and local sales tax losses on e-commerce will grow to $11.4 billion by 2012 for a six-year total loss of $52 billion."

They estimate that California's uncollected sales and use tax from e-commerce will total $8.7 billion for the 5-year period 2007 through 2012 (page 11).

The report also estimates use tax loss from any federal law that allows for an exemption for small vendors. They estimate that a de minimis level of $1 million would result in $2.6 billion of use tax uncollected for the states in 2010. The authors note that a considerable amount of e-commerce is via small vendors.

The report also includes data based on other possible e-commerce growth projections and a detailed section on the methodology used to derive the estimates.

So, what is the solution? Clearly, minimal efforts by the states to educate buyers about their use tax obligations and providing a line on the state income tax form are not working well. This is leading states to broaden the definition of nexus to find ways to make remote vendors "present." For example, New York recently enacted an affiliate nexus provision that would make companies connected through a common trademark (and other ways) present in the state. And several states have introduced bills similar to what New York did in 2008 to make "associates" in a state more than advertisers, but to make them sales helpers. (For more on this see my earlier posts: 2/10/09 and 4/22/09.)

New York State's Executive Budget report includes the following statement about the need to find ways to expand nexus:

"Many brick and mortar retailers also have mail order and Internet sales operations that are tightly integrated with their brick and mortar activities. Some of these retailers have circumvented the requirement to collect sales and use tax on their catalog and Internet sales by attempting to avoid nexus with New York, segregating their Internet and catalog operations into affiliates that are separate from their brick and mortar stores, as well as their distribution, headquarters, and other functions. This bill seeks to preclude such a practice and increase the number of remote sellers that are required to collect the State’s sales and use tax."

Is that the best way? Should Congress step in and prohibit such practices unless the state has taken efforts to make their sales tax law more similar to other states or added specified simplification measures?

Certainly, a lot of revenue is at stake and this is not new tax revenue - it is owed from laws that were enacted in most states decades ago (to create a use tax). The sales tax model doesn't work well in an e-commerce environment, yet it yields about 1/3 of state revenues so isn't easily replaceable.

Solutions to address the lost revenue:
1. Better efforts to collect the use tax from consumers. States could provide a table for computing the use tax to avoid the need to keep records except for items costing over $1,000. Better educational efforts should also help, such as states running ads online that inform people that their remote purchase is taxable.
2. Finding incentives for remote vendors to voluntarily collect. Perhaps ads by state tax agencies reminding customers that when they buy from Amazon or other large Internet vendors that they need to keep their records and pay the use tax. Maybe customers would ask Amazon and other vendors to collect it for them. These vendors should also be given an option of adding a link at the payment website to enable the customers credit card or Paypal account to be separately billed for the tax by their state tax agency.
3. States should stop raising sales tax rates making the problem worse in many ways.

What do you think?


rollin ray said...

I think a universal "Remote Sellers Tax" should be created for all remote sellers to collect from all sales and remit to the respective state. This would eliminate a tremendous burden on sellers of being knowledgeable of the myriad tax rates and laws now required just to make a sale.

David said...

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