July | August 2017




Untapped Revenue Streams in E-Commerce

By Sujit M. CanagaRetna, CSG Senior Fiscal Analyst
The South Carolina House of Representatives in April defeated an amendment that would have provided a five-year sales tax exemption to Amazon.com in exchange for the company building a distribution center in the central part of the state.  While the vote resulted in Amazon canceling plans to build the distribution center in South Carolina, it also raised a burning issue confronting state policymakers.
How should states react to the exponential growth in e-commerce transactions that largely occur without the collection of sales taxes? As states struggle to deal with the sharp drop-off in revenues caused by the Great Recession, the issues related to collecting sales taxes on e-commerce transactions continues to roil state policymakers across the country.
States continue to tussle with the fallout from the Great Recession, a downturn that caused cumulative budget shortfalls of nearly $550 billion during the 2009 through 2012 fiscal years.  But even when the national economic recovery is more robust and states begin to experience a noticeable pickup in economic activity and revenues, they will have to contend with the structural flaw in their tax systems that largely prevents the collection of sales taxes on e-commerce purchases.  This is because a 1992 U.S. Supreme Court ruling—Quill Corporation v. North Dakota—held that online retailers are required only to collect sales tax on a transaction if they have a physical presence in a the state of the purchasing customer.
In addition, the 1998 Internet Tax Freedom Act places a moratorium on any new taxes on e-commerce transactions, presenting another federal hurdle that states must overcome. For a number of years now, online-only retailers like Amazon, Overstock.com and diamond Internet retailer Blue Nile have resisted collecting sales taxes on behalf of state and local governments. The driving force behind this resistance is that applying a sales tax effectively raises the price of items, a move that would make the online retailer less competitive compared to a  bricks-and-mortar store.
While a permanent solution must involve federal legislation, states have not been sitting idly by awaiting that action.
Arkansas, for instance, passed Senate Bill 738 requiring Internet retailers like Amazon and Overstock to collect sales tax on e-commerce purchases when they do business with Arkansas-based affiliate websites.
“We have a lot of local businesses in Arkansas, both small and large companies, that collect sales tax and we are trying to level the playing field,” Gov. Mike Beebe said after signing the Arkansas bill into law.
In fact, the extreme fiscal stress states now face and the dire need for revenue has prompted a number of states to either enact or propose the following measures requiring these online retailers to collect sales taxes on e-commerce transactions:
In terms of a lasting solution, regardless of the efforts initiated by states, urgent action is required by Congress.  In fact, this Congressional action will help mitigate one of the major structural flaws corroding contemporary state revenue systems and provide a more long-term solution to the vexing revenue challenges confronting every state.
For the complete version of this SLC Fiscal Alert, please visit http://www.slcatlanta.org/Publications/FAGO/AmazonFiscalAlertSLC.pdf.

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