NYC Loses $29 Million in Sales Tax on Internet Purchases in Single Year

From July 1, 2006, through June 30, 2007, more than $50 million of combined state and local taxes on Internet sales generated by New York City consumers went uncollected, including $29 million in lost New York City revenue, according to the city's Independent Budget Office. The findings are part of the report "E-Commerce: Eroding City's Sales Tax Revenue," released this month.

The Independent Budget Office conducted the e-commerce study in an "effort to inform the ongoing discussion on the effects of e-commerce and to provide relevant city specific estimates" and an overview of the tax policy questions at the "heart of the debate" regarding the state's Internet Sales Tax provision, which went into effect on June 1.

The study notes: "The rapid growth of e-commerce -- online retail sales and electronic services -- is making many state and local officials concerned about the erosion of an important part of their tax base," and based on the study's findings, lawmakers' concerns may well be justified. New Yorkers, similar to most consumers in other cities and states, "have grown accustomed to not paying sales taxes" for many Internet purchases, even though, in most cases, taxes are actually due.

"When a remote retailer does not collect the New York sales tax on purchases by New Yorkers," the study explains, "either due to a lack of nexus with New York, ignorance, or complicity in tax avoidance, the purchaser is responsible for paying the equivalent amount in use tax. The city and state use taxes exactly mirror the city and state sales taxes and are supposed to be paid directly by consumers if the appropriate sales tax was not paid. Unlike the taxation of local sales, use taxes are inherently more difficult to administer and have low collection rates."

Among the report's findings:

• Roughly $2.2 billion of the $4.4 billion in e-commerce sales generated by New York City residents in city fiscal year 2007 is taxable. These online sales should yield about $173 million in tax revenues -- $91 million for the state and $82 million for the city.

• Sales tax has decreased in recent years as a share of total city tax revenues. From 1998 through 2003, sales taxes on average made up 15.4 percent of all city taxes; In 2006, sales tax collections slipped as a share of city tax revenue to 13.0 percent; and in 2007, it dropped to 12.3 percent of all tax revenues, or $4.6 billion of the $37.8 billion in taxes collected that year.

• According to a Tax Policy Center report, using data from the U.S. Census Bureau's State and Local Government Finance, the share of general and select sales taxes in other states and localities has also declined slightly from about 21 percent in the early 1990s to 19 percent of all tax revenues in 2005. The report assumes that the increase in e-commerce is one of the factors in the decline in the sales tax as a share of state and local taxes.