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Online Shopping and The Growing Impact on State Tax Revenue

The “Amazon effect” and heightened popularity of online shopping continues to soar across the globe. Online shopping is becoming an important part of consumer shopping habits, and for good reason. Combined with low prices and the level of convenience it offers shoppers, it is hard for traditional physical retailers to compete. Also, thanks to various different apps and mobile wallets, it is becoming more available and easier to do on the go. The Atlantic reported Amazon’s sales in North America grew from $16 billion to $80 billion from 2010 to 2016 and that half of all U.S. households are Amazon Prime subscribers. While the rate of e-commerce continues to move at warp speed, antiquated tax codes and the inability to collect tax revenue from online sales are tightening the noose on state and local budgets.

Alabama is one of six states who enacted laws in 2017 to address the lack of tax on remote sales. Specifically, the Legislature created the Simplified Sellers Use Tax (SSUT)

in 2015, which is a voluntary program that allows sellers to charge an 8 percent tax to Alabama customers. Amended in July of 2017, this program aids in the efforts to capture more state revenue from online sales and has allowed the state to collect $56 million during the fiscal year that ended in September. Compared to the $4 million collected in the previous year, this showcases the amount of money the state would have missed out on had it not been for the creation of SSUT. According to the Alabama Department of Revenue, Internet sales are growing by about 20 percent a year and sales by brick-and-mortar vendors are growing at a much slower rate.

Use tax is the current and not so great system in place for collecting tax on purchases via the internet. While consumers are supposed to pay a use tax on items purchased online, the authority of states to collect the tax is very limited, leaving it up to consumers to report their purchases which almost never happens. 

Alabama’s Attorney General, Steve Marshall, and 35 other attorney generals joined together in push for reconsideration by the U.S. government of the 1992 Quill Corp. vs. North Dakota decision. The Supreme Court sided with Quill, ruling that a taxpayer must have a physical presence in a state to require collection of sales tax by in-state customers. The physical presence rule cited in the Quill Corp vs. North Dakota case dates back to 1967, long before the internet and online shopping ever existed. The argument for the U.S. Supreme Court to reconsider the 1992 ruling states that as the volume of internet transactions continue to grow, the physical presence rule is increasingly hurting state budgets, negatively affecting funding opportunities for education and services.

The Alabama League of Municipalities has formed a digital economy task force to make recommendations to the Alabama Legislature on revenue issues related to e-commerce. While the SSUT is a great first step in helping the state collect millions of dollars otherwise not had, it is by no means a comprehensive solution. Without action at the federal level to overturn outdated rulings, states and municipalities will continue to lose tax revenue and widen the tax discrepancy gaps between online and main street retailers.    

According to Andy Gerlach, secretary of revenue in South Dakota, “You see the stores that have closed or downsized- J.C. Penny and a lot of others. If you can’t tax e-commerce, it’s going to continue to erode the taxes your state is going to take in. We need a tax policy that keeps up with that.”

States are losing billions of dollars in revenue by not being able to collect sales tax on products sold remotely, online and via mail order. Having the ability to tax online sales is one of the biggest ways states are trying to keep up with the modern economy. Alabama is one of six states who enacted laws in 2017 to address the lack of tax on remote sales.