Federal Audit: States Losing Billions to Tax-Free Online Sales

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By Ryan Prete

The U.S. Government Accountability Office has found that states could recover billions in revenue if they weren’t subject to a 25-year-old court opinion restricting their authority to tax remote retailers.

“GAO estimated that state and local governments could gain from about $8 billion to about $13 billion in 2017 if states were given authority to require sales tax collection from all remote sellers,” according to a report released Dec. 18. “This is about 2 to 4 percent of total 2016 state and local government general sales and gross receipts tax revenues.”

At issue is a 1992 U.S. Supreme Court decision, Quill Corp. v. North Dakota, which prohibits states from imposing sales and use tax collection obligations on vendors without a physical presence in-state. However, whether the modern economy can provide states with a significant revenue boost has created controversy in the past, with some disputing the accuracy of fiscal outlooks.

The GAO report further highlighted that some businesses would likely face compliance costs.

“We found that businesses with limited experience in multistate tax collection and those that lack software systems designed to facilitate multistate tax collection would incur the highest costs under such a scenario,” the report stated.

“This is especially true for those selling goods treated differently by different states and those that do not use easily-integrated software. Costs for collection software include, start-up costs, licensing fees, administrative costs, and options for premium services, such as preparing or automatically filing sales tax returns,” the report said.

Accuracy of Estimates

Many “kill- Quill” proponents have previously cited to a 2009 study from the University of Tennessee, which projected that states’ 2012 revenue shortfall from e-commerce would be $11.4 billion. The National Conference of State Legislatures combined the Tennessee findings with another Washington state study to report that states lost an estimated $23.3 billion in sales and use tax on all 2012 cross-border transactions—digital and otherwise. Those numbers were updated to an estimated loss of $26 billion in 2015.

But some accounts of state-specific revenue reports have suggested the Tennessee study overstated the numbers.

Likewise, some tax professionals are wary of the accuracy in the GAO report’s estimates.

“Every study that has previously been conducted on the issue has delivered results that overshot what actual collections looked like once states began enforcing or large operators like Amazon began collecting,” Andrew Moylan, executive vice president for the National Taxpayers Union Foundation (NTUF), told Bloomberg Tax in an email.

“But even if we assume the numbers are 100 percent on target, we’re looking at a drop in the bucket of state budgets,” Moylan said. “Heck, it’s more like a drop in the ocean.”

Joe W. Garrett Jr., deputy commissioner of revenue with the Alabama Department of Revenue, told Bloomberg Tax that the figures in the report were reliable and “in the ballpark.”

Garrett said it’s difficult to estimate the revenue loss, in part because of the lack of data. “Remote sellers who don’t collect and remit don’t tell anyone how much they don’t collect and remit, so you are forced to extrapolate from other numbers,” he said.

Garrett also said the shifting online landscape and increasing third-party marketplace sales on Amazon.com Inc.-type platforms could further expand potential lost revenue.

‘Juice Not Worth Squeeze’

The GAO estimated that under current law, states can require remote sellers “to collect about 75 to 80 percent of the taxes that would be owed if all remote sellers were required to collect tax on all remote sales at current rates"—a statement that Moylan found particularly interesting.

“The fact of the matter is that most online sales are conducted by businesses that already have physical presence and thus must collect already, even before Congress, the courts, or states do anything to add new collection burdens,” Moylan said. “This is why I have always maintained that this issue isn’t ultimately about revenue from online sales. There’s just not much there. Instead, it’s about states aggressively seeking expanded tax power, preferring to force out-of-state entities to do their work for them rather than doing the hard work of collecting from their own residents.”

Steve DelBianco, president and CEO of NetChoice, a Washington-based internet commerce trade association, shared Moylan’s opinion about the small revenue recovery.

“GAO’s report is comprehensive and credible, and should be subtitled as ‘This Juice Is Just Not Worth The Squeeze,’ since states would add less than 1 percent to their total state and local tax revenue, but would impose significant costs and risks on small businesses using the web to reach customers,” DelBianco told Bloomberg Tax in an email.

NetChoice and the NTUF were two of six organizations that filed friend-of-the-court briefs in support of a brief in opposition—from e-commerce companies Wayfair Inc., Overstock.com Inc., and Newegg Inc.—that argued that the U.S. Supreme Court should deny South Dakota Attorney General Marty Jackley’s (R) request for review of a state Supreme Court ruling that found the state’s “economic nexus” law, S.B. 106 (codified as S.D. Codified Laws Chapter 10-64), unconstitutional under Quill.

‘Confirmation of Damage’

However, some saw the GAO report as underscoring the need for the U.S. Supreme Court to intervene on the issue of digital taxation.

“The GAO report is confirmation of the damage that’s been done to state budgets and brick and mortar retailers since the 1992 Quill decision. Special treatment for online-only retailers has meant billions in lost revenue and lost jobs in communities across the country,” Deborah White, senior executive vice president and general counsel at the Retail Industry Leaders Association, said in a statement emailed to Bloomberg Tax.

“Retailers have worked in good faith with Congress to solve this problem, but have come up empty every year,” White added. “As a result, retailers are asking the Supreme Court to consider South Dakota’s direct challenge to Quill. Revisiting this decision—made when Amazon and other giant e-tailers didn’t exist—is the fastest way to resolve the constitutional problem the Court created affirmed in Quill.”

Three bills addressing remote sales taxation are pending in Congress, but there has been little movement on the measures:

Congressional Action in 2018?

During a Dec. 19 teleconference hosted by the Streamlined Sales Tax Governing Board Inc., Randi Reid, a lobbyist for the SSTGB, said the board is continuing to work with both chambers of Congress to make the digital tax bills a priority.

Reid, a principal at Kountoupes Denham Carr & Reid, a Washington-based lobbying firm, further said that while Congress won’t address the issue in 2017, it will be at the forefront in 2018. She also said the board is working to “educate” President Donald Trump’s administration about the merits of federal remote sales tax legislation.

To contact the reporter on this story: Ryan Prete in Washington at rprete@bloombergtax.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bloombergtax.com

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