There's a lot of talk about the “underground economy” draining tax revenues from city, state and federal coffers. But the online economy may be an even bigger bonanza just waiting to be tapped.
The U.S. Commerce Department reported today that online retail sales totaled $44 billion in the fourth quarter last year, up from $38 billion a year earlier. E-commerce sales totaled $165 billion for all of 2010.
Perhaps even more startling, e-commerce now accounts for 4.3% of total retail sales, up from a scant 1% just a decade ago.
While this may be good news for online retailers and for consumers, who generally can find a wider selection at competitive prices online than they can in the “real” world, it's a growing source of angst for local governments, which rely heavily on sales taxes to fund their operations.
This is hardly a secret. In fact, numerous surveys have found that one of the things consumers like about shopping online is that they don't have to pay sales tax, which can be quite significant. Los Angeles, for example, imposes a 9.75% sales tax on most purchases, New York City charges 8.875% and some purchases in Chicago can go as high as 11.50%.
One recent study found that online shopping was growing faster in states and cities with a high sales tax rate than in states with lower rates or no sales tax. (Yes, there are such places. Alaska, Delaware, Montana, New Hampsire and Oregon have no statewide sales tax).
In theory, citizens of most states are supposed to report their purchases and pay the taxes on them if they're not collected by the merchant. This is about as widely observed as the speed limit and, except for New York and a few other states, no attempt is made to compel online retailers to collect the sales tax on purchases shipped into the state.
One reason for this is that, in a libertarian moment back in the infancy of the Internet, the U.S. Supreme Court ruled that states could not force retailers to collect sales tax unless they had a physical presence in the state where the order was being shipped.
This has led to some interesting stand-offs and some rapid decisions to move facilities around the country. Perhaps most notable is the recent dust-up between Texas and Amazon.com. Last fall, Texas decided that an Amazon.com distribution center in Dallas amount to a physical presence and sent Amazon a bill for $269.
Amazon responded by saying it will shut down the center and move its operations out of Texas.
As local governments become more desperate for money, it's likely there'll be more stand-offs like that between Amazon and Texas. It may be that the no-sales-tax states corner the market on e-commerce distribution centers.