In the current fragile recovery, counties and state governments are still facing budget challenges. This fiscal issue is compounded by counties’ inability to enforce existing taxes on online sales. As recently as last month, the Senate passed a non-binding amendment to the FY2014 Senate Budget Resolution in support of the Marketplace Fairness Act, a bill that would help states and local governments to collect sales taxes on online purchases.
Why does this issue matter to counties?
This is actually not about a new tax, but a better way to collect sales and use taxes on online sales already owed to states and counties. All except five U.S. states already have a sales tax on the books. However, due to a Supreme Court Case these taxes are unenforceable on online sales because it is up to individuals to self-report their online purchases.
E-commerce sales – transactions occurring online, including retail sales as well as transactions between businesses - have been growing rapidly over the last decade, topping $200 billion in the US 2010. According to the U.S. Census Bureau, the bulk of the online trade still occurs between businesses.
According to the U.S. Census Bureau 2010 Survey of Manufactures, e-commerce trade made up less than 5 percent of total retail trade in 2010, but e-commerce trade for wholesale trade of goods such as clothing, oil, and pharmaceutical products is higher, between 10-60 percent. Further, among manufacturing shipments, e-commerce represented 46 percent of total sales in 2010.
Source: U.S. Census Bureau, Annual Retail Trade Survey
Some of the revenue from these taxes would come from regular brick and mortar businesses, because many of them have an online and mail-order business for which sales taxes are not currently collected. However, the vast majority of the revenue from retailers would come from businesses such as Amazon and E-bay, which do not have a physical store location and comprise 80.2% of retail e-commerce sales.
A University of Tennessee study estimated that the total loss from unenforced taxes on online sales to states and local governments in 2012 was approximately $23 billion, and a separate study found that most states could narrow their FY2012 budget gaps by 10-20 percent with the enforcement of their state sales taxes on online retailers, with some states, such as Missouri and Arkansas, actually ending up with a surplus.
Online sales are going to be an increasing part of our world. The outcome of the Marketplace Fairness Act will signal whether Congress is up to the task put forward by the Supreme Court and will address the lost revenue to counties and states.