Is Solution to State Deficits Only a Mouse Click Away?

With a number of states facing swelling budget deficits, what if there was an easy way for them to get billions of dollars in uncollected taxes?


There is—in theory at least. That's why many states are continuing to push Congress to let them collect sales taxes on all online and catalog purchases. A bill is expected to be introduced this summer calling for such a move, though previous efforts have gone nowhere.

The group spearheading the drive, the National Conference of State Legislatures (NCSL), recently released a report showing that US states could eliminate 13 percent of their combined budget gaps if there was an online sales tax.

"[Such federal legislation] closes a tax avoidance loophole costing states about $23 billion," said Neal Osten, a spokesperson for the NCSL.

Right now, consumers do pay sales taxes online, but only if the retailer has a physical presence, or "nexus," in the state.

That means companies that exist only online—such as Amazon and —don't have to collect sales taxes. And that gives them a competitive advantage over retailers such as Wal-Mart or Macy's .

That fact has caused opponents of an online sales tax to question whether such a significant amount of money could actually be raised by such a tax. But proponents of the law—including 23 states and the National Retail Federation trade group—aren't giving up.

"There's more and more money being lost or uncollected because the shopping patterns have shifted," said Maureen Riehl, vice president of the National Retail Federation's Government and Industry Relations Counsel. "The status quo is not acceptable to us anymore."

According to the NCSL, state governments that collect sales tax—totaling 46 states and the District of Columbia—will lose an estimated $8.6 billion in potential revenue this year, with the loss projected to rise to $23.26 billion in 2012.

Among the states is California, which could potentially recover nearly 9 percent of its projected $46.32 billion budget gap this year, the largest in the US by far, according to the data. Missouri and Arkansas could potentially cover their entire budget gaps—and still have money left over.

See slideshow about which states would benefit most from an online sales tax.

Various bills for a tax have been introduced over the past decade. Sen. Mike Enzi, R-Wyo., was set to introduce the latest version on Thursday, but decided to postpone until the summer to add a co-sponsor.

When introduced, Riehl said this version of the bill will smooth out various points of contention from its previous models—such as simplifying the definitions of taxable items; a stronger public perception that it isn't a new tax, but "collecting a tax that's already owed;" and a reimbursement plan that compensates retailers a fraction of the cost of collection, with more money going to smaller retailers.

"It's leveling the playing field for everybody," Riehl said. "Either everyone collects or no one collects."

But Forrester Research principal analyst Sucharita Mulpuru said the adoption of a federal bill still faces challenges, such as how to regulate the compliance of small sellers.

"It's a pretty complex problem to solve," she said. "There's a reason it hasn't been solved yet."

Opposition: The Numbers Are Inflated

The current law's requirement for a physical presence in a state has caused an upheaval in places such as New York, which charge that Web sites like Amazon do, indeed, have a physical presence through affiliates—third-party sites that link to their merchandise for a commission.

As a result, Amazon has withdrawn its affiliates in states such as Rhode Island and North Carolina, and has a lawsuit against New York awaiting ruling in appellate court.

Other pure-play retailers and online marketplaces such as eBay have long opposed such legislation, which some say could shift dollars to brick-and-mortar retailers like Wal-Mart .

Brian Bieron, eBay's senior director of federal government relations and global public policy, argued that reports often overinflate the numbers that states could earn from this sort of tax, including a study conducted by economists at the University of Tennessee—the study upon which the NCSL's figures are based.

Bieron pointed to a contrary study, which notes that a significant amount of this inflation comes from the university's inclusion of figures for business-to-business sales, "a substantial amount of [which] are not subject to sales and use taxes," according to the study.

Bieron also pointed to the fact that the presence of multi-channel retailers—who are already taxed—is growing on the Web, saying that gives less share to purely online companies.

According to Internet Retailer, is the largest online retail company in terms of 2009 sales with $24.5 billion, but brick-and-mortar stores Staples , Dell , Apple and Office Depot round out the top five.

Bieron argued the law would only hurt smaller sellers, though it would initially only apply to retailers of a certain size that has yet to be determined.

"Giants dominate the retail business, including increasingly on the Internet," he said.

Fingers typing on a keyboard, close-up.
Fingers typing on a keyboard, close-up.

Mulpuru said she doubts the tax would raise enough money for states, saying they'd probably have better luck finding funds elsewhere. She said the tax wouldn't have much impact on sales for large companies such as Amazon, which have a more efficient online presence than most multi-channel retailers.

"The tax advantage is only part of the advantage that Amazon has," she said. "For multi-channel retailers to jump up and down with glee that something finally evens the playing field is a little misguided."

Mulpuru said that at worst, the tax rules would cause some shoppers to shift their online spending to other retailers, and that it won't hamper the 11 percent growth e-commerce posted in 2009. What's more, she stands by her prediction that the industry will grow to $248.7 billion in sales by 2014, regardless of such taxes.

"You're not even going to notice it, given the upward trajectory that the business is on," she said.

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