Sales Tax Slice: How Much Revenue Do States (Really) Lose From Remote Sales?

The exact amount of tax revenues that states are unable to collect from online retailers is unclear.  This is so whether measured in the amount of foot traffic in stores or dollar amounts estimated by stakeholders or other groups.

The House Judiciary Committee (finally) held a hearing about how to capture sales tax on remote sales a few weeks ago, and Chairman Bob Goodlatte (R-Va.) opened by comparing foot traffic at some brick-and-mortar stores with retail web traffic online.

Overall shopping center foot traffic has fallen 50 percent in three years, and several large retailers—Staples, RadioShack and JCPenney, for example—have announced they will close many stores, Goodlatte said. Meanwhile, Internet commerce is booming, with fourth quarter U.S. retail e-commerce sales up 16 percent from the same period in 2012.

And based on constitutional principles, states lack the authority to impose sales tax on remote sellers that do not have a “physical presence” in their state, the U.S. Supreme Court held in Quill v. North Dakota, 504 U.S. 298 (1992).

Foot traffic may be one way to measure the revenue loss to states, but what about actual dollar amounts?

"Lost tax revenues mean the state and local governments will have fewer resources to provide their residents essential services, like education and police and fire protection,” said House Judiciary Committee ranking member Rep. John Conyers (D-Mich.) at the hearing. He said the Michigan Department of Treasury estimates Michigan loss of revenue from remote sales will total $290 million this fiscal year.

According to a University of Tennessee study and the National Conference of State Legislatures, total remote sales tax losses by the states are estimated to have been $23.26 billion nationwide for 2012, with $11.39 billion of those losses coming from electronic sales.

But after the Wisconsin Department of Revenue issued its loss estimates, a nonpartisan public policy think tank did a study and took issue with the state’s findings. The Wisconsin Taxpayers Alliance released a report this week estimating that the state’s losses from lack of sales tax collection on remote sales tax is likely overstated, according to a story published in Bloomberg BNA’s Daily Tax Report.  For 2012, the Wisconsin Department of Revenue estimated that the state’s remote sales tax losses totaled $140 million for electronic sales. 

The report found that of the Internet-based sales that are subject to sales tax, about 70 percent of the taxes are already being collected by large retail stores like Walmart, Target and Best Buy, with the list of electronic retailers that are collecting the state’s sales tax growing. And now that Amazon is collecting sales tax in Wisconsin based on the physical presence of opening a distribution center there, the Wisconsin Taxpayers Alliance found in its report that the lost sales tax revenue from remote sales could be as low as $25 million in 2014.

The Tax Foundation recently reported that states rely on sales and use taxes for 22.5 percent of their state and local tax collections.  Four states—Delaware, Montana, New Hampshire and Oregon—do not impose sales tax at all at the state or local level; Alaska does not impose sales tax at the state level but imposes local sales tax.

Continue the discussion on Bloomberg BNA’s State Tax group on LinkedIn: How pressing is the need for remote seller sales tax legislation?

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