For online vendors, this year’s record sales for Cyber Monday may have been like Santa arriving early, but for states and municipalities that collect sales taxes, it was more like getting a lump of coal in their Christmas stockings.
For more than 10 years, city, county, and state governments have been complaining about their inability to collect taxes on online sales. As these sales have increased, their complaints have grown louder, and on Monday, Moody’s Investors Service agreed it was a problem.
“In the absence of a solution, failure to capture this revenue stream will continue to pressure states’ bottom lines,” said Kimberly Lyons, assistant vice president and analyst at Moody’s. The current situation is a credit negative, Moody’s stated.
Online sales increased by roughly six times from 2000 to 2010, according to the Department of Commerce. Figures for 2011 so far suggest the year’s online sales total will greatly eclipse that of 2010.
A 1992 Supreme Court ruling decided that internet retailers were not required to collect sales tax unless they had a physical presence in the state. The court left it open to Congress to change the situation. Currently, there are four federal bills pending that would, to greater or lesser degrees, require sales tax on online commerce.
Sales taxes are the second largest form of revenue for states, according to the National Association of State Budget Officers. Forty-five states collect sales taxes. In those states, sales tax revenue accounts for an average of one-third of all tax revenue.
In the current fiscal year, the online exemption will cause those states to lose 11% of all sales tax revenue they would otherwise receive. Taken together, these figures indicate the states are losing 3.6% of the tax revenue that they would otherwise receive. With online retailing growing, absent any changes in the laws concerning sales tax collection, this percentage will grow.
If the lack of online sales tax collection is not addressed, the loss of revenue will be a growing problem for cities, said Lars Etzkorn, program director of the National League of Cities. The collection of these sales taxes “would help cities during these difficult times right now.”
The same technology that has made it easy to make purchases online could make it easy to collect sales taxes, Etzkorn said. “Since they are owed, they should be paid,” he added.
Susan Gaffney of the Government Officers Finance Association agreed. “We’ve been calling for the collection of all sales taxes since sales catalogs in the ’80s,” she said. The collection of these taxes “would enhance governments’ fiscal standing.”
“There is no better time than now — when local governments and states are continuing to find ways to mitigate the difficulties brought on by the financial crisis of the country over the past few years — to grant authority for remote sales tax collection,” four state and local government groups said in a two-page letter to leaders of the Judiciary Committee, which held a hearing on the issue Wednesday.
Moody’s statement follows a report by Standard & Poor’s in October on online sales tax collection.
“While we don’t see a near-term impact on credit quality, states and localities will have to deal with any long-term revenue effect in order to maintain balanced budget operations,” said David Hitchcock, senior director in public finance ratings.
