The State Editorial -- Internet Sales Take Ever-Larger Bite Out of Tax

Internet Sales Take Ever-Larger Bite Out of Tax

The following editorial, calling for the collection of sales tax for online purchases, appeared in the October 25, 2003, edition of The State, a daily newspaper in Columbia, South Carolina.

Remember the first time you surfed the Internet? The first time you bought something over the Internet? Probably not. Cyberspace has become so ubiquitous that it's easy to forget that most people didn't even know what "online" meant a mere decade ago.

What's even more astounding than the speed with which this new medium has insinuated itself into our daily lives is the way it has transformed our economy.

From an asterisk in the mid-'90s, e-commerce sales grew to $755 billion in 2001. A widely regarded study produced by University of Tennessee economists projects that number to grow to $6 trillion by 2011.

Like the catalog sales before them, Internet sales are largely untaxed. While states can and do require local businesses to collect sales taxes for them, the U.S. Supreme Court has said they need congressional approval to require out-of-state businesses to do the same. Nearly all states require residents to pay what's called a use tax (which is set at the same rate as the sales tax) on goods they receive by mail, but it's difficult to enforce. As a result, most of us violate the law.

Those violations of the law add up. And the number is growing dramatically.

The Tennessee study says Internet purchases cost states $13 billion in sales tax revenues in 2001; that number is expected to grow to $55 billion in uncollected taxes by 2011.

South Carolina is no exception. In 2001, we lost $153 million because residents bought products over the Internet and didn't pay the required tax on them. That number is projected to more than triple, to $525 million, by 2006 and rise to $640 million by 2011.

One hundred fifty-three million dollars might not sound like a lot in the context of the 2001 state budget, which was $5.5 billion. What's alarming is the growth: That 2006 figure could constitute nearly 10 percent of state tax collections.

The growth of e-commerce is the main reason sales taxes are eating up a smaller and smaller percentage of income. (The other drivers are growing tax exemptions and the trend toward lower spending on products and higher spending on services, which are largely untaxed.) Just from 1979 to 2000, the portion of consumer spending that was covered by state sales taxes dropped from 51 percent to 42 percent.

That erosion of the sales tax base means that governments must either dramatically cut spending or else raise taxes, just to collect a stable amount of money.

There's a reasonable alternative to raising the rate on sales taxes or on other types of taxes. It's to collect the sales tax on all purchases, whether they're made at your neighborhood store or over the Internet. The added advantage of this approach is that it strips out-of-state businesses of an unfair advantage they now have over in-state businesses.

Unfortunately, we can't do that without approval from either the Congress or the Supreme Court. And we aren't going to get either unless and until the states manage to standardize and simplify their sales tax definitions and rules. South Carolina officials are working with nearly all of the sales tax states on that effort. Ultimately, though, nothing they come up with will matter unless our General Assembly agrees to make the needed changes. It's important to start talking to our legislators now about this problem, so that when the time comes, they can approve the changes that will allow our state to collect the taxes it is due.