May 11, 2011, 4:07 PM

A sales tax windfall for web shoppers

California says it lost $795 million last year from online sales taxes.

Paul Demery

Managing Editor, B2B E-commerce

Lead Photo

On average, only 1.4% of California consumers pay “use” taxes due on Internet purchases from Top 500 online retailers, in effect evading the sales tax they would pay in bricks-and-mortar stores, a California tax collection agency says.

Consumers are generally required to pay use taxes on Internet retail purchases if the retailer doesn’t collect a sales tax in the 45 states that charge sales tax. But the California study shows how few consumers do voluntarily pay those taxes.

The California State Board of Equalization, or BOE, the state agency charged with managing sales tax collection, also estimates in a separate study that the state lost $795 million in revenue last year due to unpaid sales and use taxes on sales by out-of-state Internet and catalog retailers. A nationwide study by the University of Tennessee estimates that revenue loss from unpaid sales and use taxes on Internet and catalog retail sales will amount to $23.3 billion in 2012.

The California BOE study of Internet purchases from Top 500 retailers, which was released this week and is based on figures in the 2010 edition of the Internet Retailer Top 500 Guide notes that payment of use taxes is highest among taxpayers in households with more than $100,000 a year in income. But even this group only pays 4% of the taxes due, while less affluent consumers pay less than 1%, the BOE says. The state’s total sales and use tax rate applied to retail purchases ranges roughly between 8% and 10%, depending on the local tax rate of cities and other jurisdictions.

The BOE study also estimates that California households spend on average 1% of their personal income on purchases at Top 500 online retailers. Households with incomes of more than $100,000 spend 0.6% of their income, or more than $600, while other groups with household incomes of less than $100,000 spend from 1.5% to 1.6%, the study says.

The study also estimates that, on average, California households owe 0.06% of their income for use tax. The percentage drops to 0.03% for households with incomes of more than $100,000, or more than $30 due in use tax, but rises to 0.08% and 0.09% for other groups with household incomes of less than $100,000.

The BOE study, citing a figure in the Top 500 Guide, notes that Top 500 retailers account for 94% of total online sales.

 

Comments | 1 Response

  • Though think tanks project this legislation as a source of huge windfall revenue, the results in those states which have already passed this legislation has told a significantly different story. The design of this bill, using affiliates to establish nexus, is inherently flawed. Online companies simply cancel their relationships with those affiliates, thus eliminating nexus, and consequently the tax collection obligations. In testimony before a House Committee in Colorado, a representative from the State Budget Office confirmed that the state had only collected $20,000, not the $5MM expected. Colorado legislators are working to repeal the tax, and similar legislation has been filed in Rhode Island and North Carolina. The states that have passed this tax have not found the expected windfall; instead they have caused additional unemployment and the movement of larger companies out of state. Before California passes this bill, citizens and legislators should demand to know the results experienced in the states that have endured this legislation already. This is a proposal rife with unintended consequences.

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