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What would be the effects of Internet sales tax?

Rochester Business Journal
July 4, 2014

Suppose Mr. Patel, a resident of Rochester, would like to buy shoes. This simple desire of his can be fulfilled in one of two ways. Mr. Patel can visit any one of our many retail establishments and purchase his shoes or he can shop for his shoes on the Internet. If he chooses the former option, he will certainly have pay the New York sales tax. If he selects the latter option, he may be able to get away with paying no sales tax.

This state of affairs raises two basic questions. First, should Mr. Patel have to pay the state sales tax on an out-of-state Internet purchase? Second, what would be the quantitative effects of subjecting out-of-state Internet commerce to state sales taxes?

An answer to the first question was provided by the U.S. Supreme Court in a prominent decision in 1992. The court ruled that in the absence of explicit federal regulations, the Commerce Clause did not permit states to compel online sellers with no presence (nexus) in the state to collect use tax on sales to state residents.

However, since 1992 the world of Internet commerce in the United States has changed dramatically. The U.S. Department of Commerce reports that online sales in 2012 totaled nearly $226 billion. In addition, online commerce now accounts for a growing share of total retail commerce. Therefore, the National Conference of State Legislators points out that when sales totaling such a large figure are left untaxed, states lose out on a combined $23 billion in uncollected sales tax revenue.

The online giant eBay, some conservatives, antitax activists and some small online businesses are opposed to taxing Internet sales. Even so, it is fair to say that the tide is turning against this kind of thinking and many policy makers now believe that Internet commerce ought to be taxed like all physical retail transactions are. The proposed Marketplace Fairness Act now before Congress would make Internet commerce subject to state sales taxes and thus would level the playing field for both online and physical retailers. That is why the National Retail Federation, big retailers such as Target and Best Buy, and even the online giant Amazon are now all in favor of a law like the MFA.

The likelihood of a law allowing states to tax Internet commerce brings us to the second question posed above about the attendant quantitative effects. In interesting recent research, the economists Liran Einav, Dan Knoepfle, Jonathan Levin and Neel Sundaresan have shed valuable light on how Americans shift their purchasing across states and between offline and online retail in response to state sales taxes. Two of the results obtained by these researchers are worth emphasizing. First, a 1 percent increase in a particular state’s sales tax leads to an increase of almost 2 percent in online purchasing. Second, a 1 percent increase in a state’s sales tax results in a 3 to 6 percent decrease in the volume of online purchases from home-state sellers.

The above percentage changes in sales may appear small but they really are not when viewed in the context of all Internet commerce in the U.S. today. So, although there is a sound rationale for taxing Internet commerce, lawmakers need to comprehend that the consequences of such taxation are likely to be noteworthy for both the volume of Internet commerce and for the share of online commerce in all commerce.

Amitrajeet A. Batabyal is the Arthur J. Gosnell professor of economics at Rochester Institute of Technology, but these views are his own.

7/4/14 (c) 2014 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email service@rbj.net.


What You're Saying 

David Campbell at 4:53:48 PM on 7/3/2014
Thank you for covering this important topic.

Two observations regarding the the quantitative effects:

1. The research by Dr. Sundaresan and his team demonstrate the tendencies of consumers to easily evade sales taxes by shifting to buying online when their loca...  Read More >
Keith Yockey at 12:46:31 PM on 7/4/2014
If Mr. Patel buys on Amazon, WalMart.com, Target.com or many other websites that have a presence in New York, he still pays Sales Tax. If he finds an eBay seller that meets MFAs exemption, he does not pay sales tax at purchase, but still owes Use Tax to NY. It's a line ite...  Read More >
Susan Lindsey at 11:23:18 PM on 7/4/2014
Based on the 2013 census, online is 6 percent of all retail. Of that amount, 90% is controlled by giant big box retailers such as Wal-Mart, Best Buy, Macy's, Home Depot, Amazon (yes, big box with its expanding warehouse and other physical presence). They all back the Marke...  Read More >

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