States could gain billions from taxing online sales

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State and local governments could gain between $8 billion and $13 billion in tax revenue this year if states were given the authority to require sales tax collection from all remote sellers, such as e-commerce websites, according to a new government report.

The report, from the Government Accountability Office, estimated that would equate to around 2 to 4 percent of the total 2016 tax revenues that state and local governments collected from general sales and gross receipts. However, the report acknowledged that some businesses are likely to see increases in different types of costs if they were required to collect taxes on all their remote sales. The costs would be even higher for businesses that aren’t experienced in multistate tax collection. On the other hand, state revenue department officials told the GAO they generally don’t anticipate major administrative costs or challenges on their end if they had the authority to collect tax on all remote sales.

The report's release comes at a time when Congress is poised to pass tax reform legislation that is expected to slice into the local tax revenues collected by state and local governments. The tax reform bill produced by the conference committee last week would limit the state and local tax deduction to $10,000, allowing taxpayers to use a combination of income taxes, property taxes and sales taxes within the $10,000 limit.

Forty-five states and the District of Columbia already levy taxes on the sale of goods and certain services, including those sold remotely, such as via the internet. In 1992, the Supreme Court ruled in the landmark case of Quill v. North Dakota that a state can only require a business to collect and remit sales tax if it has a substantial presence, or “nexus,” in that state. The Supreme Court left it to Congress to pass legislation to overrule this limitation, but so far Congress has not agreed on what approach to take. In general, under present law, if a seller doesn’t have nexus in a state, and thus doesn’t collect tax, then purchasers are required to pay a use tax in the same amount to their state government, although few do so.

The GAO estimated that state and local governments can, under current law, require remote sellers to collect around 75 to 80 percent of the taxes that would be owed if all sellers were required to collect tax on all remote sales at current rates. But the GAO also found that the extent to which state and local governments can require businesses to collect taxes varies with the type of remote seller and by state.

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Sales tax State tax revenues State taxes E-Commerce GAO