A Closer Look at Uncollected Online Sales Tax

Since its inception, Amazon, eBay and other e-tailers have enjoyed a powerful competitive advantage: exemption from sales taxes. While the tax on individual book purchases might seem trivial, it adds up to a fortune in the aggregate: according to CBS News, “states estimate they lose some $11.5 billion a year in uncollected sales tax.” In California, that all changes tomorrow. As of 9/15, online retailers are now required to collect sales tax from all its California customers. Seven states have already enacted similar laws, and seven more are expected to by 2016.

What does this all mean? We take a closer look at the arguments for and against uncollected online sales taxes below.

The Argument in Favor: Lost Government Revenue

The supporters of making online retailers collect sales tax (largely politicians) make some version of the following argument. Fundamentally, they say, an online bookstore is no different than a local sellers that already collect sales tax every single day. Supporters point to the staggering amount of tax these companies generate each year, look at the even higher volume of orders from websites, and conclude that states are letting millions or even billions of dollars in revenue slip through their fingers.

This argument is exemplified by California Congresswoman Jackie Speier, who told CBS News:

“When you’re losing that sales tax revenue, that means it’s affecting your roads, it’s affecting the resources for local government, it’s affecting the resources for education.”

In short, the argument in favor amounts to making online retailers pay their fair share, leveling the playing field with competitors, and providing more revenue to state and local governments.

The Argument Against: Depressed Online Sales

The critics of this law make a starkly different argument. States, they say, have no constitutional right to levy sales taxes on out-of-state merchants. Only states in which retailers have a physical presence can do that. The other argument is that taxing an activity (such as online book-buying) causes people to engage in that activity less. Therefore, when someone claims that a tax will produce a certain amount of revenue, those calculations are wrong—they are assuming pre-tax sales levels will continue after the tax is in place, when that almost never happens.

There is some evidence for this theory. In the last two years, online retailers have terminated profitable relationships with successful resellers in states ranging from Illinois to Texas to California, all because the sales tax collection requirement was deemed too onerous and difficult to be worth complying with from a dollars-and-cents standpoint. Clearly, this is an unintended byproduct of the requirement, but deserves consideration nonetheless.

Who’s Right?

The answer is: it depends. The consequences in various states have reminded us that the intentions of a law often vary from the actual results. On the other hand, states do stand to collect at least some revenue from making web retailers charge sales tax. The full economic impact of these laws will become evident in the years a