While the loss of Internet retail sales taxes is not currently significant enough to hurt state and local government credit ratings, it could become a problem in the future, Standard & Poor’s said in a report issued Monday.
“Internet commerce is growing faster than overall retail sales, and if trends continue the loss of tax revenue could become significant,” said David Hitchcock, the credit analyst who authored the seven-page report entitled, “Will Internet Sales Taxes Lead to More Revenue for States?”
The National Conference of State Legislatures has estimated states will lose a total of $23.2 billion by not being able to collect sales taxes from online and catalog purchases. But the report said New York, the first state to begin collecting such taxes, has estimated its additional revenue will total $58 million, which Standard & Poor’s said is “modest” compared to its estimate of $8.4 billion for total sales taxes.
“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,” the report said.
Internet retail sales taxes reported for the first half of 2011 were $93.6 billion, 17.5% higher than the $79.6 billion reported for the same period in 2010, according to preliminary data from the U.S. Commerce Department cited by the rating agency in its report. The jump is almost three times the increase in non-Internet retail sales taxes, which were $1.987 trillion during the first half of the year, 7.9% higher than the $1.832 trillion reported for the same period the previous year.
Generally, states have been blocked from requiring Internet retailers overall to collect sales taxes by a 1992 Supreme Court decision in Quill Corp. V. North Dakota. In that case, the high court ruled that state could not impose a tax on Quill because the office supply retailer did not have any physical presence in North Dakota.
The court’s reasoning was based partly on the concern that there are thousands of separate sales tax jurisdictions that if they adopt varying tax requirements, this could severely restrict interstate commerce.
The Streamlined Sales Tax Project was created in 2000 to help states adopt uniform standards for what is taxed across state lines so they could mitigate the Supreme Court’s concerns. Currently, of the 44 states involved with the project, 24 have enacted legislation in line with the project’s model and nine others have such legislation pending, according to the report.
However, the model legislation has not yet been tested by a court challenge and, because it only provides a framework for uniform standards regarding what is taxed, states will also have to come up with uniform standards on how to collect Internet retail sales taxes, Standard & Poor’s said.
More recently, New York has discovered a way to work around the Supreme Court decision and require Internet retailers to collect the sales tax and other states are also following this same path.
In the Quill case, the Supreme Court found the state had no physical “nexus” to the retailer. But New York passed a law making clear that online retailers’ affiliates — the small businesses that sell goods through the retailers’ websites — are based in the state and have a physical presence in the state.
Amazon Inc. and other online retailers with affiliates in the state are currently collecting Internet sales taxes in New York, even though there is a pending court challenge to the law.
California passed a similar law as part of its fiscal 2012 budget, the report said. Amazon responded by threatening to cut its ties to its small business retailer affiliates in the state. The state has since passed compromise legislation that would delay the requirement that Internet retailers collect sales taxes until at least Sept. 15, 2012. That law would only take effect if Congress has not passed legislation by July 31, 2012, requiring Internet retailers to collect sales taxes.
Amazon has recently announced a deal with Tennessee to collect retail sales taxes, in exchange for a three-year grace period and only if the federal lawmakers do not pre-empt state collection efforts, Standard & Poor’s said.
Several lawmakers in Congress, with the support of large, so-called bricks-and-mortar retailers like Walmart and Sears, are supporting legislation that would require the collection of Internet retail sales taxes to that online retailers are on a level playing field with retailers with physical stores.
Most recently, Rep. Steve Womack, R-Ark., introduced the Marketplace Equity Act of 2011, that would benefit Bentonville-based Walmart. The bill would give state the authority to collect sales taxes from major online retail companies. It would carve out an exemption for retailers with “small amounts” of online sales in a given state.
Two identical bills pending in the House and Senate would certify the standards created by the Streamlined Sales Tax Project, require some modifications for simplification, and provide states who use the standards with clear authority to require retailers to collect sales taxes already owed.
They also would exempt certain small businesses. Called the Main Street Fairness Act, the bill in the Senate, S. 1452, is sponsored by Sen. Richard Durbin, D-Ill. HR 2701, pending in the House, is sponsored by Rep. John Conyers Jr., D-Mich.
Standard & Poor’s said there remains “a big uncertainty” about whether the federal government will enact legislation that would facilitate collection of Internet sales taxes or whether the courts will rule on the validity of the recent spate of state Internet sales tax collection laws.