Facing Rising Deficits, States Consider Enforcing Sales Tax Regs

The troubling effects of falling tax revenues continue to multiply for elected officials facing rapidly growing deficits. Forty-one states collected less revenue in fiscal 2002 than they had planned for in their budgets. Nationwide, sales tax collections were 3.2 percent lower than originally budgeted, personal income tax collections missed states' targets by 12.8 percent, and corporate income taxes were 21.5 percent lower than projected.

In the face of such news, state officials are beginning to contemplate sales tax on online shopping as a way to save countless small government programs, as reported by A.P. In California, collecting sales tax on online sales from businesses with stores in California -- such as Barnes & Noble -- could raise at least $200 million annually.

In a December 19 letter, the American Booksellers Association once again called on the U.S. governors in the 45 states that collect sales tax to fully enforce existing regulations by ensuring that retailers with a physical presence in their state collect sales tax on online sales. In the letter, ABA CEO Avin Mark Domnitz wrote, "Importantly, we are in no way discussing any new 'Internet taxes.' Rather, we are urging the state taxing authorities to look behind the facades of a 'separate' Internet company that some national chains use to argue that they have no physical presence within the state. This is patently not the case, as even a cursory look at their business model reveals."

"We can no longer ignore an entire segment of the retail marketplace," said Pat Leary, lobbyist for the California State Association of Counties and a frequent online shopper, as reported by A.P. In 2000, California Governor Gray Davis vetoed a bill that clarified California tax law to ensure that online retailers with bricks-and-mortar stores in the state would collect sales tax. However, now facing a record shortfall, Internet sales taxes are among many options on his table, Davis spokesperson Hilary McLean said, as reported by A.P, which noted that the estimated $200 million from online sales taxes could offset possible cuts of $201.8 million in public health care for the poor.

As online sales broke records this holiday season, the question of lost sales tax takes a higher profile in state capitols. A study prepared by the Center for Business and Economic Research at the University of Tennessee for the Institute for State Studies found that in 2001 e-commerce resulted in an approximate loss of $13.3 billion in total state and local government revenue. By 2006, the loss will more than triple to $45.2 billion, and, in 2011, the loss will be $54.8 billion. By 2011, the study found that states will lose anywhere from 2.6 percent to 9.92 percent of their total state tax collections due to e-commerce sales.