A number of states have passed or are considering passing legislation that would force out-of-state online retailers to collect sales taxes. Most of the public discussion about these Internet taxes has been focused on Amazon, one of the largest online retailers, so commentators now talk about the “Amazon tax.”
Whether one believes that out-of-state retailers should be forced to collect that tax or not, this chart shows 1) why it is unlikely that states will be able to address their budget problems with a new Internet sales tax; and 2) why it is not a good idea to design tax policy around one retailer, in this case Amazon, without considering the million other e-businesses affected.
Using data from studies conducted by Internet Retailer, an e-commerce intelligence company, this graph illustrates why an Amazon-based Internet tax won’t make a lasting impact on state budgetary problems. In 2010, overall U.S. retail sales amounted to $3.92 trillion, with 4.2 percent ($165.4 billion) coming from Internet sales. That means that even if the tax were implemented, it wouldn’t (for now) raise anywhere near enough money to fill the states’ projected cumulative $131 billion budget gap.
More importantly, while it is true that Amazon is by far the biggest Internet retailer, it only represents a small share of overall e-business. As you can see, Amazon’s domestic sales amounted to 11 percent ($18.2 billion) of all online sales. Thus, Amazon sales equal less than half of one percentage point of total U.S. retail sales. Therefore, attempts to base an Internet sales tax around a single retailer like Amazon will likely prove inefficient.
I should note that the issue around the Amazon tax is not whether e-commerce should be exempt from all taxes. The Internet is not a tax-free zone. First, companies selling over the Internet are generally required to collect taxes in places where they have a physical selling presence. Second, in theory, consumers do owe their states the money already, in the form of the user tax — although in reality there are no good ways for states to enforce collection of that money. Hence the states’ attempt to force online retailers to collect the money for them, even when the companies do not have a physical presence in that state. That’s what Amazon objects to — especially considering the complexity and cost associated with dealing with a hodge-podge of regulations and tax rates in 50 states and local municipalities.
Even if Amazon would be able to stomach the added compliance and collection cost of a new tax, the millions of much smaller retailers that make up the bulk of e-commerce might not be. Designing a tax based on the ability of the biggest player to cope with the new cost is bad economics and bad policy.
Apart from getting chronic state overspending under control, it seems that a better solution would be for Congress to adopt an “origin-based” sourcing rule for any states seeking to impose sales-tax obligations on interstate vendors. This rule would be in line with constitutional protections for interstate commerce, would allow for the continued growth of the digital economy, and would ensure that excessive, inefficient taxes do not unduly burden companies. My colleague Adam Thierer and I looked at this option in a recent paper called “The Internet, sales taxes, and tax competition” (our previous work on the subject is here). Back in July, Ramesh wrote a good Bloomberg column arguing for origin-based taxation, too.
Certainly origin-based taxation is a better way to level the playing field than what Amazon is currently doing. Amazon is promising jobs and investment in exchange for tax exemptions in some states where it has a physical presence. Such special pleading is the inevitable result of being targeted by tax collectors who are not satisfied with the revenue from businesses within their own jurisdictions. However, if Amazon succeeds, the result would be the equivalent of corporate welfare: One company will get special tax treatment unavailable to others. That could create a vicious cycle where only large companies can get tax-free status in exchange for promises of jobs.
Update: Yes, origin-based taxation is not meant to maximize tax revenue for states. However, it raises revenue while inducing competition between states and minimizing the burden of tax collections for e-businesses. This, overall, benefits consumers not to mention that it is in line with the intent of the Constitution.