Internet Sales Tax Collections Falling Far Short of Experts’ Estimates

The federal government is considering a bill to let states expand their sales tax authority to cross-border Internet transactions. A number of states have reached agreements with large Internet retailers, imposing tax on their sales in return for new facilities and jobs. Some states have imposed "Amazon taxes," measures to defy Supreme Court rulings that have either been struck down already or are in court. States are using every revenue dip to plead poverty and demand Internet tax collection authority, and recent budget proposals (MO, MD, VA) have included tax cuts premised on new revenue from Internet taxes if Congress acts by 2015 or 2018 or so.

Central to all of this is the assumption that sales taxes on Internet transactions will be a big revenue boost to the states. The study everyone cites on this is the 2009 study State and Local Government Sales Tax Revenue Losses from Electronic Commerce by Professor Fox at the University of Tennessee, which estimated that states would lose $11 billion in 2012 if they could not tax the Internet. Some critics question whether Fox correctly accounted for the fact that tax is already paid on much Internet commerce, but for the most part Fox's state-by-state numbers are treated as the best estimate of how much money states might get.

Not anymore. Since some states began taxing the Internet in 2012, we are learning how far off Fox's estimates are. Korey Clark at State Net crunched the numbers:

Last month [California's] Board of Equalization reported that in its first full quarter of collections, which included last year's busy holiday shopping season, it took in $96.4 million, a much-needed boost to the state's bottom line to be sure, but nowhere near the $457 million quarter implied by the Tennessee study.

In New York, another affiliate-nexus state, online retailers had remitted $360 million in sales taxes on over $4 billion in taxable online sales as of February 2012, according to the state's Department of Taxation and Finance. While that figure represents about 90 percent of all taxable online sales in the state, it is also well below the $2.5 billion the Tennessee study predicted.

"To the extent the estimates being used are overstating reality, and I think they are, it is not solving anyone's deficit problem," said Navigant Economics Managing Director and Principal Jeff Eisenach, who co-authored a study that pegged the national online sales tax potential at $3.9 billion, about a third of the Tennessee study's estimate.

Fox, reached for comment by State Net, pointed to small retailers not paying tax, although it's hard to believe that's why the numbers are off by 75 to 80 percent. NCSL, another Internet sales tax booster, blamed Amazon terminating agreements with its affiliates, but as this did not occur in either California or New York it's not an explanation.

The real explanation is that Fox's numbers are probably overstated by four- or five-fold. Before states start writing revenue expectations into their budget plans, they ought to be aware of this fact.