Online Sales Tax Collection Comes With Uncertain Rewards

By: - November 29, 2011 12:00 am

Another Cyber Monday shopping spree has come and gone, with most states failing to collect sales tax from customers who are buying or online retailers who are selling. But states have reason to hope that this situation will change in the not-too-distant future. If that happens, what would it mean for state revenue collection? A new study out of Indiana suggests that nobody can be quite sure.

The study , conducted by the Indiana Fiscal Policy Institute and the Ball State University Center for Business and Economic Research, tried to figure out how much revenue Indiana will miss out on in 2012 as a result of the absence of Internet sales tax collection in 2011. Existing estimates range wildly, from $39.6 million to $216.9 million. The numbers differ so much because the tax, for now, is mostly hypothetical.

The study’s own method places the number somewhere between $39.6 million and $114.3 million, with $77 million as the midpoint of the estimate. To arrive at that figure, the authors modeled how much sales tax Indiana currently collects, using variables such as personal income and the actual tax rate. Then they tried to project the role that broadband Internet subscription has in decreasing sales tax collections — and used those numbers to infer how much revenue the state missed.

The result contrasts with a widely cited report from the University of Tennessee, which projected lost revenue in all 50 states based on federal data estimating online sales. That report predicted Indiana would lose $216.9 million in 2012, and suggested that if anything, it might be underestimating how much states are missing out on. “We view our estimates as lower bounds on the expected sales tax revenue losses,” the University of Tennessee study concluded. “These… studies aren’t really disagreements,” responds Michael Hicks, one of the Indiana authors. “They’re just different methods.”

Currently, Amazon and other large online retailers don’t collect sales taxes in most states because of a 1992 Supreme Court ruling that said businesses only have to collect them in states where they have a physical presence. But, as Stateline has previously reported, there are signs that might change, including a deal between Amazon and California to begin collecting online sales taxes in the 2013 fiscal year. States are pressing for a federal law to require online retailers to collect the tax.

Despite the significant differences between the estimates, Hicks says that all the studies point to the same basic conclusion: “These are big enough numbers in the context of missing tax dollars that it’s a serious issue.” But, he adds, “This is not a panacea. Even if the highest numbers are right, this isn’t going to fundamentally change the way government operates here in Indiana.”

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Josh Goodman

Josh Goodman helps lead research on fiscal management and place-based economic development programs as part of Pew’s state fiscal health project. Goodman has served as a primary author for Pew studies that examine how states should evaluate tax incentives and maintain budget discipline when implementing those incentives.