WASHINGTON — State and local governments are concerned that the expansion of E-commerce, estimated at roughly $4 trillion, is eroding their tax base, according to a new Congressional Research Service report.
In a report sent to Congress early last week, CRS shows estimates of the amount of online transactions and outlines pending legislation that would allow Streamlined Sales and Use Tax Agreement states to require out-of-state vendors to collect sales taxes.
Congress has been debating an online sales tax law for two decades since a 1992 Supreme Court ruling in Quill Corp. v. North Dakota said that states can only require an out-of-state seller to collect taxes on residents if the seller has a physical presence in the state.
The Census Bureau estimated that $4.1 trillion worth of retail and wholesale transactions were conducted over the internet in 2010, or 16.1% of all U.S. shipments and sales for that year. The University of Tennessee Center for Business and Economic Research, in a 2009 report, estimated E-commerce would be at least $3.9 trillion this year. "The volume of e-commerce is expected to increase and state and local governments are concerned because collection of sales taxes on these transactions is difficult to enforce," said Steven Maguire, author of the report and public finance specialist with the CRS.
State governments rely on general sales and use taxes for just under one-third of their total tax revenue — about $223 billion in fiscal 2009. Local governments receive 11.2% of their tax revenue — approximately $62 billion in fiscal 2009 from general sales and use taxes.
"The growth of internet-based commerce will have the greatest effect on the states most reliant on the sales and use tax," Maguire wrote. "In addition to having more revenue at risk, high reliance states also face greater efficiency losses because of their generally higher state tax rates."
The report comes at a time when state and local governments face serious fiscal challenges and continue to seek alternative methods to generate additional revenues. State tax collections have been growing for nine consecutive quarters according to a recent Rockefeller Institute on Government report but local tax collections continue to decline as home prices fall.
Congress has been considering legislation that would require out-of-state retailers to collect and remit online sales taxes. Both House and Senate committees have held congressional hearings in recent weeks revisiting legislation that was introduced last year. Senate Commerce Committee Chairman Sen. John Rockefeller, D-W.Va., told reporters earlier this month that Congress will move on the Market Place Fairness Act in the lame duck session after the November elections.
"The impact of congressional action or inaction on remote collection issue will vary significantly by state" due to the different base taxes and tax rates in each state, Maguire wrote.
The tax base and tax rate determine how much revenue is generated by the sales tax for each jurisdiction.
As of Aug.1, California had the highest state sales tax rate of 8.25%. Five states: Indiana, Mississippi, New Jersey, Rhode Island and Tennessee, have the second highest state sales tax rate of 7%.
A handful of high tax rate states have increased efforts to inform consumers of their responsibility to pay use taxes on Internet and catalog purchases. Due to the potential revenue losses, states are more likely to support reforms that help maintain their sales and use tax revenue base, Maguire said.
"Residents in high sales tax rate jurisdictions could benefit more from internet purchases and tax evasion relative to those in low tax rate states," Maguire wrote. "States with high rates — and whose residents have a greater incentive to evade taxes — are exposed to greater potential revenue losses from the growth of internet commerce."
Some opponents of an online sales tax charge that the complexity of state and local sales tax systems supersede the benefits of enacting such a proposal. In an effort to squash those concerns, a handful of states have been working to sychronize sales tax collection and created the Streamlined Sales and Use Tax Agreement (SSUTA) back in 2000. There are 21 states that have enacted laws that comply with the SSUTA and three more that are nearly fully compliant.