By Brian Kilcourse, Managing Partner
6/23/2009
On Sunday June 7, the San Francisco Chronicle published an editorial to say that it’s high time to tax retail sales on the internet. What gave rise to this opinion is the fact that California is “broke, busted, and disgusted,” and needs money. And so (no surprise!) a state legislator has floated a bill in the state to emulate New York’s law that requires sales tax to be collected on purchases sent to a NY address. The NY law also states that for the tax to apply, the seller has to have at least one affiliate in NY, and that’s the “loophole” that has enabled most companies to avoid taxing their customers, by shutting down their NY-based affiliate marketing programs. Undaunted by any fear of this tactic, California State Assembly person Nancy Skinner, D-Berkeley, has introduced AB178 (which the Legislature won’t take up until sometime in 2010).
Napkin Arithmetic
So just how big is revenue generating opportunity from a sales tax on internet retail sales? According to the U.S. Census Bureau, “the estimate of U.S. retail e-commerce sales for the first quarter of 2009… was $31.7 billion, an increase of 0.7 percent (±1.1%) from the fourth quarter of 2008. Total retail sales for the first quarter of 2009 were estimated at $909.6 billion, a decrease of 1.8 percent (±0.4%) from the fourth quarter of 2008. The first quarter 2009 e commerce estimate decreased 5.4 percent (±2.5%) from the first quarter of 2008 while total retail sales decreased 10.2 percent (±0.4%) in the same period. E-commerce sales in the first quarter of 2009 accounted for 3.5 percent of total sales.”[1]
California represents about 13% of the U.S. GDP, so let’s apply that same ratio to total U.S. retail sales. That would mean that for the 1st QTR, California retail sales were about $118 billion. Internet retail sales are about 3.5% of total retail sales, so we’ll guess-timate $4B for the Golden State for the 1st QTR. California sales tax rates vary by county from 8.250 to 9.750, so let’s be fairly conservative and use 8.5%. That means that the tax revenue opportunity for 1st QTR would have been about $340M – certainly not chump change, especially compared to the fact that NY reports having collected only $70M in the less-than two years since the law was enacted.
Given that California has a budget deficit for the upcoming fiscal year of about $24B, one has to wonder why the Legislature is waiting (could it be because “Gubernator” Schwarzenegger has said he will not sign any budget that has tax or fee increases, and so the Legislature is waiting out the expiration of his term in 2010?). Besides California, Minnesota, Connecticut, Illinois, Tennessee and Hawaii are also considering an internet sales tax. In the 6/9 Chronicle editorial, Lenny Goldberg, executive director of the California Tax Reform Association is quoted as saying, “… if (AB178) were to pass, Congress would have to take some action on this. Between California and New York, you’d see the discussion taking hold.”
Leaving aside the obvious opportunity to plug up some deficit spending, there are other issues worth thinking about. What triggered Skinner’s action was the demise of Berkeley’s beloved store Cody’s Books, an independent business and long-time retail icon, which the legislator pinned on “state sanctioned tax avoidance.” Said Goldberg in another SF Chronicle op-ed piece, “State-sanctioned tax avoidance is in fact what has been happening as a result of the failure of the state Legislature and of the state's sales tax agency, the Board of Equalization, to collect taxes on sales into California by companies with substantial presence in the state. Not only is Amazon.com abusing the law with regard to its massive sales into California, but a whole Web-based cottage industry has grown up based heavily on a business model of avoiding sales tax.”[2]
What Do You Think?
One thing is for certain, internet sales are big enough to pay attention to, and there are a lot of moving parts to the “internet sales tax” issue. However, it’s not clear from all the noise level being raised about this issue how consumers themselves feel about it! When in doubt, it’s always a good idea to ask, so here’s your opportunity. We’ve created a quick one-question survey that asks the simple question, “Is it time for U.S. states to tax internet purchases?”
Ask your friends and workmates to cast their vote too. We’ll post the results next week.
[1] U.S. Census Bureau News, Quarterly Retail E-Commerce Sales 1st Quarter 2009, May 15, 2009
[2] Internet tax avoidance hurts jobs, public, Lenny Goldberg &Hut Landon, SF Chronicle, May 17, 2009
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