Americans Online Seen Paying States Seeking $23 Billion

Kelly Blair, a banker from the Baltimore suburbs, spends hundreds of dollars online every year buying gifts and household supplies like pet food and shampoo. She doesn’t check to see whether she owes sales tax -- though her home state of Maryland says that she should.

“I had no idea,” said Blair, 30.

U.S. states forgo as much as $23 billion a year in sales tax as consumers like Blair spend money online at businesses far across state lines. That’s because officials rely on consumers to pay it. Millions of consumers technically are violating their states’ tax laws, and the states have chosen not to pursue them one by one through audits.

That situation may change: A measure that Majority Leader Harry Reid, a Nevada Democrat, said will pass the U.S. Senate this week would let states require companies such as Inc. and dealers in EBay Inc. online auctions to collect sales taxes. That may lead to a boon for state governments only now emerging from the fiscal blows of the recession.

“It’s rare to have an opportunity to collect tax revenue that’s already owed,” said Donald Boyd, executive director of the State Budget Crisis Task Force, a private group that issued reports on state fiscal matters. “From a state perspective, it’s a very good thing. There is a hole in tax bases that is only going to grow otherwise. It’s significant revenue over the long term.”

The debate in Congress has been set against the backdrop of a lobbying battle pitting retailers such as Wal-Mart Stores Inc., state governments, the Obama administration and shopping mall owners against direct marketers, anti-tax groups and lawmakers from states without sales taxes.

Amazon, EBay

Amazon, which is expanding its distribution network and its physical presence in more states, supports the bill. EBay opposes it and has attempted to rally its users.

In three procedural votes so far, U.S. senators have demonstrated that at least 74 of them back the sales tax proposal. Reid said today that “just a few individual senators” are blocking the bill and he would call the Senate into session over the weekend, if needed, to finish work on it.

The proposal has less support in the Republican-controlled House of Representatives.

The legislation would in effect reverse a 1992 U.S. Supreme Court decision from the mail-order catalog era. The court prevented states from applying sales taxes to transactions with sellers that lacked a physical presence in their states. That’s given an advantage to online retailers over businesses such as Wal-Mart and Williams-Sonoma Inc.

Counting on Passage

U.S. states have been pressing Congress without success to change the law since the late 1990s, during the early days of the Internet retailing business. With the measure gaining ground in Congress, some states are already planning for the influx should it pass.

A bill in Missouri would count on the revenue to pay for a quarter-point cut in income tax rates. Laws enacted in Virginia and Maryland would use the sales tax funds to avoid raising the gasoline tax to pay for transportation projects.

As she filled her tank at a gas station outside Baltimore, Blair, the banker, said she may spend more money at local stores if the online sales tax pushed up prices.

“But if they lowered the price of gas, that’d be a good thing,” she said.

Online retail sales rose to a seasonally adjusted $59.5 billion during the fourth quarter of 2012, up 16 percent from a year earlier, according to the Census Bureau. That meant more than 5 percent of all U.S. purchases were made online, up from less than 2 percent a decade earlier.

Going Alone

Some states already have sought to collect sales taxes. Nine of them, including California, have enacted legislation to require out-of-state retailers with affiliates in the state to collect taxes due from their customers, said Max Behlke, who follows e-commerce for the National Conference of State Legislatures. Such steps haven’t provided a solution, he said.

“They will never be able to do it on their own unless Congress acts,” Behlke said.

William Fox, an economist with the University of Tennessee who has studied tax collections on Internet sales, estimates that about $11 billion, or about one quarter, of the tax on online commerce -- including transactions between businesses -- was uncollected in 2012.

When catalog sales are included, he said, that rises to about $23 billion. That amounts to an estimated $4.2 billion in forgone revenue for California, $1.5 billion for Florida, and $1.8 billion for Texas. Fox said the current system hurts states and encourages consumers to shop online instead of at local businesses, further affecting local economies.

‘Major Problem’

“It’s a very major problem,” he said. “Everybody realizes the probability of getting caught is very low -- and if you do get caught, you say you’re sorry and you mail in a check.”

By April 2012, half of the states allowed for residents to pay taxes on goods bought outside of the state when filing their state income-tax returns, according to research by the Minnesota House of Representatives.

Few have. In 2009, California collected $10.2 million that way from just 0.3 percent of the state returns filed, while New York collected $35 million, according to the research.

Jay Rockefeller, a Senate Democrat who’s an advocate of the online sales tax bill, said he wasn’t sure whether he had paid the required sales levies due back home in West Virginia. “I have no idea,” he said. “I hope so.”

‘It’s Small’

“Any way you look at it, it’s small,” Verenda Smith, deputy director of the Federation of Tax Administrators, a Washington group that assists state tax officials, said of those who pay the tax. “You are absolutely supposed to pay it. That tax never goes away, but few people do.”

It’s unclear how much sales tax would remain uncollected if the bill became law, because it exempts businesses with less than $1 million in remote sales, Fox said.

Jeffrey Eisenach, an economist with Navigant Consulting Inc., estimates that the amount of lost tax revenue may be half what Fox estimated.

Still, the revenue would be a welcome boost to state governments that had to close budget shortfalls of $593 billion over the past five years, requiring them to raise taxes or cut spending on schools, health care and other programs. It wasn’t until last year that state tax collections surpassed where they were in 2008, before the full brunt of the 18-month recession.

“Every bit of revenue that we’re not collecting that we can collect would really make a positive difference when you have such tight budgets,” said Scott Pattison, the executive director of the National Association of State Budget Officers in Washington.

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