February 17, 2003

Online Sales Tax: No Big Deal

For years, you've heard that a major factor in Tennessee's budget crisis is the state's inability to collect taxes on purchases made over the Internet. Well, now some of the largest retailers in the nation are voluntarily collecting those sales taxes for Tennessee and every other state that has sales taxes. And guess what: it's going to amount to mere pennies, fiscally speaking. Here it is in the New York Times:

Analysts say the online sales taxes from the recent new retail converts are likely to yield little more than $30 million in new online sales tax revenue this year — which would not amount to much as it is split up among the nation's 7,500 or so state and local tax jurisdictions.

The largest portion of the $51 billion total online sales that Jupiter is forecasting is expected to go to big Internet-only retailers that have shown little inclination to collect sales taxes. Holdouts like Amazon resist collecting sales taxes because they say it would be too burdensome to collect and dispense them on behalf of so many different jurisdictions. And they currently have federal law on their side. The Supreme Court ruled in 1992 that a company selling only online, or through catalogs or by telephone, is not obliged to collect local sales taxes from customers, except in states where the merchants actually have a physical presence, like a warehouse or a call center. In taxation parlance, such physical presences establishes a "nexus" between the retailer and those states.