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Posted at 9:43 AM ET, 02/18/2011

How online retail is starving states

By Ezra Klein

blog_ecommerce_2011.jpgSpeaking of state budgets, Kevin Drum brings up an important issue that's largely flying under the radar. One of the main ways state governments fund themselves is through collecting sales tax. But you can't collect sales tax on Internet retailers who aren't based in your state. And, as you can see in the graph atop this post, they're accounting for a lot of retail these days -- $44 billion in the last quarter alone, or about 4.3 percent of total sales. That total, as you might imagine, is rising steadily, and states that rely on sales taxes are finding they're raising less and less.

There's an easy answer to this: Shift over to income taxes, or some other kind of tax. But conservatives in state government won't allow that to happen. And in a state like California, where you need a two-thirds majority to raise taxes, they've got the veto power to keep it from happening. Drum comments:

This is a good example of what Jacob Hacker and Paul Pierson call "policy drift" in Winner Take All Politics ... state and local tax revenues will decline not because of any active change in public policy, but because Congress has chosen to sit idly by. Conservatives will succeed in starving government simply by doing nothing to respond to a technological change.

By Ezra Klein  | February 18, 2011; 9:43 AM ET
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Or here's another plan, have major retailers collect sales tax and distribute it to the states. We do this in New York and folks, the world hasn't come to an end and I'm still buying things online. Amazon will kick and scream and cut off all their associates in the state, but it can be done.

Talking as if this is a problem is playing into the hands of the internet business crowd, who no longer need protection. I think that their business model has been proven successful.

Posted by: cathyd72 | February 18, 2011 10:10 AM | Report abuse

cathyd has is right.
It is actually simple to track and tax onlie sales. All it takes is the will to do it and a couple of huge fines with a 3 day jail sentence fr the CEO.

Posted by: newagent99 | February 18, 2011 10:18 AM | Report abuse

My solution would be to have a federal sales tax (not a VAT) of say 5% on all online sales that aren't otherwise taxed. I.e. you either pay the state sales tax or the federal sales tax, but not both.

This would specifically preempt any state attempts to collect state sales tax on interstate commerce. That would level the field with the states and provide the Federal government with some much needed new revenue, while at the same time address online retailers concerns about having to comply with 50 different state sales tax codes.

Posted by: jnc4p | February 18, 2011 10:26 AM | Report abuse

How about people try to rid themselves of the idea that governments are entitled to a slice of every transaction that takes place between an ostensibly free people?

Posted by: msoja | February 18, 2011 10:37 AM | Report abuse

Hey, msoja, how about people acting like adults and admitting that they've got to actually pay for government services?

I guess the easiest agenda in the world is one that says you can have everything for free.

In any case, as far as online retail is concerned, Amazon is particular heinous in this respect.

Posted by: leoklein | February 18, 2011 10:44 AM | Report abuse

And as usual, no discussion on online sales tax would be complete without mentioning the obligation of the taxpayer to pay the "use" tax in those states if the transaction isn't otherwise taxed.

Posted by: jnc4p | February 18, 2011 11:08 AM | Report abuse

The online business model is proven.

That taxes and reporting regulations are inhibiting expansion of economic opportunity across the board below the mean (income) is proven.

That some small businesses simply lack the technology and/or the staff to manage paying sales taxes to multiple states is proven.

Why not tax online interstate commerce above a specific sales volume? Twenty million dollars in sales volume seems fair.

Posted by: WLWelch | February 18, 2011 11:20 AM | Report abuse

"Hey, msoja, how about people acting like adults and admitting that they've got to actually pay for government services?"

Hey, leoklein, how about less services that you're asking others to pay for?

Posted by: WrongfulDeath | February 18, 2011 11:28 AM | Report abuse

--*Hey, msoja, how about people acting like adults and admitting that they've got to actually pay for government services?*--

How about people acting like adults and paying for the services they use?

Posted by: msoja | February 18, 2011 11:52 AM | Report abuse

Oregon has no sales tax and relies primarily on income tax. Problem is, this is extremely cyclical and magnifies the boom+bust. It really, really doesn't help in a downturn.

Posted by: goinupnup | February 18, 2011 12:28 PM | Report abuse

Because CONGRESS has sat idly by?

I'm sorry, it is the states that aren't doing anything to modernize their taxation schemes. They have a variety of reasons for doing so, but they all boil down to protecting the rich and taxing the poor.

There's no reason AT ALL that states should be able to solve their local revenue problems by extracting money from different states.

State revenues are a state problem. States should be the ones responsible for fixing it.

Posted by: pj_camp | February 18, 2011 1:02 PM | Report abuse

I've been writing about this problem for more than a decade and the solution is quite straightforward:

>> The sales tax rules of the ship-to address must always apply. <<

Solutions for building this into online shopping carts are readily available from multiple vendors, making this a seamless process for both the virtual retailer and shopper. No "use tax" returns for citizens to fill out. No ambiguity about "nexus" or in-state brick-and-mortar presence. No valid concerns about excess complexity due to the 300-400 local sales tax jurisdictions.

The result would be a level playing field for all retailers, catalog, online, brick-and-mortar or multichannel. The states and cities would collect desperately needed revenues that are already lawful.

Congress can resolve this with a one-paragraph bill - "The Ship-To Address Applies" - then stand back and let the States follow through out of self-interest.

Posted by: jtenser | February 18, 2011 3:29 PM | Report abuse

Ezra, I wonder if you read the comments and answer questions. that would be awesome. I wonder because every single time i've ever bought anything on the internet, i've always been charged for sales tax based on my credit card address. from well known to obscure websites alike. Are those retailers actually paying that back to the states, are there even laws to enforce and assure that is happening, or are these companies pocketing that?

Posted by: ButterBiscuit | February 18, 2011 3:52 PM | Report abuse

Do conservatives in California still have the power to stop tax increases? I believe proposition 25 allowed budget related legislation to pass with a simple majority.

Posted by: AaMP | February 18, 2011 6:36 PM | Report abuse

"How about people acting like adults and paying for the services they use?"

Soggy will be providing proof of payment for all the government services he's mooched from in 3..2..1...

Posted by: pseudonymousinnc | February 18, 2011 7:22 PM | Report abuse

--*services he's mooched*--

You're a liar, mousi.

Posted by: msoja | February 18, 2011 10:21 PM | Report abuse

So, because some (completely unknown) percentage of people buying useless junk online "may not" pay the appropriate use tax or safe harbor amount when filling out their sate taxes; the solution is to tax everyone (especially those irritating non-buyers of junk) more. What a classic EK solution!

Posted by: davidring | February 18, 2011 11:12 PM | Report abuse

You should read Quill v. N.Dak, the court case that is usually misinterpreted as saying that states can't collect tax from out of state vendors. What it really said is that the current structure of state sales taxes would put an excessive burden on interstate commerce. The message was clear that if the states simplified things for out of state vendors, perhaps one rate per state and a central place to remit the tax, the answer would probably be different.

There have been some half-hearted attempts at tax harmonization, but it'd be interesting to dig down and see why they haven't gone anywhere.

As the former mayor of a small municipality that gets about half of what we spend on cops, snow plowing, etc. from sales tax, I really would like the businesses who hire local people and pay local rents not to be at a disadvantage to anonymous out online retailers.

Posted by: johnlevine | February 19, 2011 12:09 AM | Report abuse

There's actually a fairly easy fix, but it requires the cooperation of Congress. Enact a uniform sales tax law that allows each state to enact its own rate (but only one rate a state--no local add-ons) and has a uniform set of inclusions and exclusions from the tax. Any shipment into any state would be subject to tax unless the purchaser had a resale certificate. And, of course, any state could opt out or even have a lower rate for mail/Internet orders than from brick and mortar retailers. The applicable rate the merchant is required to collect would be determined by the zip code to which the shipment is made.

Posted by: sltax1 | February 19, 2011 12:52 AM | Report abuse

When the Supreme Court ruled on this matter in 1967 and 1992 it was too difficult for a remote seller to keep track of the thousands of jurisdictions - which is why they were exempted from the obligation to collect. Moving forward to today, large internet retailers easily manage millions of items for sale at any given moment, and even the smallest internet retailer can calculate accurate shipping rates to every corner of the country in a blink of an eye - it is no longer too difficult to keep track of a few thousand local jurisdictions.
Our company offers a FREE service, named TaxCloud, which automatically calculates accurate local sales tax for every jurisdiction in the United States. Internet merchants can point their existing e-commerce systems at TaxCloud for sales tax calculation, the same way they point at USPS/FedEx/UPS for calculation of shipping rates. For those states which have come into compliance with the Streamlined Sales Tax Agreement, TaxCloud will also automatically remit collected sales taxes, file periodic sales tax returns, and our company will act as the primary responder in the event of a jurisdictional audit. This service is completed FREE to merchants.
It is time to pass federal legislation, such as the Main Street Fairness Act which was introduced in 2010 but not voted on, in order to ensure local business do not have to continue competing over price with internet-only retailers that are taking advantage of a 43-year old ruling to escape their obligation to collect local sales tax.

Posted by: bvaccaro1 | February 19, 2011 7:12 PM | Report abuse

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