Why Aren't More States Pursuing Online Sales Tax?

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At a time when numerous states teeter on insolvency due to budgetary woes, they're ignoring a pile of money sitting right in front of them. Although most states charge a sales tax as one of their sources of revenue, few aggressively pursue sales tax from online commerce. Why aren't they more interested in cashing in on this growing method of shopping?

First, just how much money is at stake? Last year, e-commerce spending was $142 billion, according to comScore. The amount of shopping and sales tax rates both differ by state. But for simplicity, if you assume that the average state sales tax is somewhere around 5%, then that would be around $7 billion states gave up. This isn't going to solve all of their budgetary problems, but it certainly would help.

In fact, many states do require that residents pay sales tax on their Internet purchases. The problem, however, is that the onus is usually on online shoppers to report their purchases. Good luck getting people to carefully calculate their online shopping receipts and voluntarily sending their state a check larger than their income taxes require each year. This method of tax collection simply isn't practical, and states would have a very difficult time meaningfully auditing people, as it's difficult to prove how much shopping someone did online.

As you can probably guess, most people don't want their online transactions taxed. A recent poll by Rasmussen indicates that 63% of American adults don't want the federal government taxing Internet shopping. Only 24% were in favor. Of course, that would be a new tax, since the federal government does not impose a sales tax. But presumably most of these people also don't want states to begin actually forcing people to pay online sales tax.

The big problem with taxing online transactions stems from logistics. When you have a physical store located in a state, it's pretty easy to enforce its collection of sales tax. Authorities can physically audit their receipts. It's also relatively easy to tell physical shops what tax rates should be applied to their sales. After all, their number is relatively limited to just those in your state.

Now think about Internet sales. Online shops are located across the world. An online retailer can sell an item in any state. It would have to have every state's sales tax built into its website's framework to provide customers with the correct after tax total cost for their shopping. And that doesn't even bring local taxes into account, as some cities require additional sales tax as well. This could get quite complicated.

And yet, progress could be made. Some states, like New York, have already begun trying to more aggressively pursue sales tax on some Internet shopping. But most states have not. They probably worry about the enforcement problem. The logistics might not be too burdensome for major online retailers like Amazon, but a little Internet start-up might not be able to as easily figure in sales tax to their order totals.

States need to solve this problem; it isn't impossible. Perhaps they should work together to put together a concise listing of taxes that can be provided to online retailers. They could then also provide periodic updates as a group. If states can find ways to cut down on the difficulty online retailers face when trying to collect these taxes, then those shops would have fewer excuses for not doing so. If states do nothing, then the amount of tax revenue they will lose out on will only continue to grow as the popularity of online shopping continues to grow.

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.
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