Antiquated Sales Tax Laws Not Fit for Online Retail

Since e-commerce became big enough to think about, governments have been crying over lost sales tax revenue from online retail sales. We’re talking US here. The latest estimate is that $1.5-$2 billion in sales tax revenue will not be collected in 2013 because, per a 1992 Supreme Court ruling, online retailers don’t have to collect sales tax if the sale is to a customer that is located in a state where the retailer has no physical presence.

For example, if I buy something in the state in which I live (State A) and it has a sales tax, I’ll pay a sales tax. If I buy something while visiting another state (State B), with a sales tax, I’ll pay a sales tax. But if I buy online from State B, and the retailer in State B has no physical presence in State A, I won’t pay a sales tax. Logically and reasonably this doesn’t make sense.

Sales taxes are used to fund many types of government projects, not least of which is to build-out and maintain the infrastructures businesses and consumers need to conduct commerce, such as roads. Without tax revenue, infrastructures don’t get built and maintained and commerce doesn’t happen. It’s a circular. And governments have argued this point ad nauseam.

The problem with current sales tax laws is that they don’t take into account the dual-locality of online transactions. They don’t take into consideration that an infrastructure is needed at both the point of sale (State B, in this case), as well as the point of use (State A). Were it not for the physical infrastructures in both locations (and many points in between, including the Internet), the sale could never have happened.

So if sales taxes are needed and used to support infrastructures for commerce, who gets the tax revenue from an online sale? Is it the state in which the product is made or sold, or is it the state in which the product will be used? Or both? Should online sales tax revenue be split between states or should online sales be double-taxed? What if State A (user) has no sales tax, but State B (seller) does, or vice versa?

I don’t know that there is an easy answer, but it is clear that the structures of our current sales tax laws were never meant to take into account the dual-location aspect of online commerce. As such, not only do we need to address the collection of sales tax revenue, but we also need to consider how that revenue is split between the states.