The internet is still cutting into Texas sales taxes
July 17, 2017
We’ve heard a lot about how online shopping is taking a bite out of brick and mortar stores, leading to a collapse in retail employment. But it continues to pose problems for state and local governments, which lose billions of dollars in sales taxes each year to online purchases.
Sales taxes made up 31 percent of total state revenue in 2016. But the Supreme Court found in 1992 that it’s only legal to impose sales taxes if the vendor has a physical presence in the state where the buyer is located.
Over the years, that has taken a toll on state sales tax collections — 22 states saw their revenues either decline or fail to keep pace with inflation last year, according to an NPR analysis of Census data. Over the last four decades, the aggregate tax base for all states has shrunk rather than grown, a 2015 study found.
“To try to stem the erosion of sales tax revenue, states are getting creative in determining what “physical presence” means — for example, expanding the legal definition to include online marketplaces that drive traffic to out-of-state retailers in return for a small cut of the proceeds, as Rice University Baker Institute fellow Joyce Beebe outlines in a brief issued today.
That is creating a patchwork of state laws that frustrate retailers — especially smaller ones that have fewer resources than Amazon, which earlier this year started collecting sales taxes in all 50 states. There are several proposals in Congress to create a uniform system, but they’ve been mired in disagreements for at least 15 years.
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So, is that what’s happening in Texas, where sales taxes make up more than half the state’s revenues? Under state law, buyers are supposed to pay a “use tax” on items purchased from out of state, but compliance is largely voluntary and infrequent. Amazon has been collecting sales taxes in Texas since 2012, and since then has remitted more than $270 million to the state.
Amazon, however, doesn’t collect taxes from the 40 percent of third party sales that take place on the Amazon platform. Indeed, according to the Comptroller, only about 1 percent of the state’s sales tax revenues come from online sales, which suggests substantial avoidance by online retailers.
Sales taxes were down in fiscal year 2016, for the first time since 2010. But that also happened to coincide with the largest oil-related downturn in 30 years, so it’s difficult to tell whether the internet was at fault. Here’s what sales tax collections have looked like over the past decade in Texas’ major cities:
Clearly, economic cycles have a more powerful impact on sales taxes than leakage from online sales. Still, the state may be leaving tens of millions of dollars on the table each year, which turns out to matter when legislators are looking to plug holes in the budget.
Over the long term, unless Congress changes the law nationwide or the Supreme Court revisits its 1992 decision, Texas may want to consider making itself less dependent on sales taxes anyway. As the internet complicates the question of where sales occur and who collects taxes on them, the state could insulate itself from the risk of massive tax base erosion by looking for revenue from other sources as well.