Online Sales Tax Disappoints

States were understandably excited when the Supreme Court decided to allow them to force sales tax compliance for remote sellers.  The National Conference of State Legislatures said that states were leaving a lot of money on the table — the taxes on $25.9 billion sold in their states by businesses in other states. The Government Accountability Office put the untaxed sales at $8.5–13.4 billion.

There’s a big difference between those two numbers, of course, but either way it looked like a lot of money.

The National Taxpayer’s Union Foundation has published a new study, however, that makes the difference between those two estimates seem minor. NTUF gathered data from 32 states that are now requiring out of state companies to collect sales tax. Not a single state was collecting the amount of money the National Conference of State Legislatures predicted they would. Only two states hit the midpoint of the GAO predictions.

On average, each state expects to collect just 0.7 percent of general fund revenue. 

Why are the predictions so far off?

NTUF has a couple of suggestions to explain the inaccuracy of these predictions. For one thing, e-commerce is the growth area when it comes to retail, but it’s still just 10% of purchases. The new predictions were just too optimistic when they guessed what sales might be.

Perhaps more important, they weren’t considering how much of online sales was already collecting sales taxes. Amazon, which was already collecting sales tax pretty much everywhere when the Supreme Court Wayfair decision came along, accounts for about one quarter of all online sales. Walmart and other large retailers carve out another big chunk of e-commerce sales. 

Then there are the small Mom and Pop e-commerce shops that don’t meet the threshold for sales tax compliance. Between the big chains that already had physical nexus and the small companies that don’t meet the thresholds is a relatively thin layer of remote sellers who need to comply with new sales tax laws.

Don’t forget the companies that are supposed to comply but don’t. A Quickbooks study found that 30% of small businesses didn’t even know about these important legal changes, while more than half didn’t have a clean understanding of their sales tax responsibilities.

Finally, there are the businesses that have decided not to sell outside their state, because it seems too complicated.

What’s the outcome?

With one thing and another, states just aren’t collecting that much from remote sellers. 

Are they drawing back and requiring less of out of state companies? No. On fact, one thing states seem to be doing to make up for the lack of revenue is increasing the number of audits they’re performing. 

There have of course been costs involved in making these sales tax law changes. The lower than expected revenue collection stacked up against those costs has led to some strong reactions. Many states are expected to get more aggressive with their audits. 

What’s the solution?

The best solution: get into compliance as quickly as possible. The best strategy? Contact us to see how Sales Tax DataLINK can make sales tax compliance easy for your company. Working not just with retail but also with manufacturers, construction companies, and many more industries affected by Wayfair, Sales Tax DataLINK offers expert advisement, sensible software solutions, and practical outsourcing options. Call (479) 715-4275 to talk to a sales tax expert.

Latest Articles

Sales Tax and Luxury Tax

Sales Tax and Luxury Tax

a Luxury taxes are special sales taxes charged only on luxury goods, non-essential items that usually are expensive. In New York, for example, there's a luxury tax on the purchase of houses costing over $1,000,000. From 1991 to 1993 there was a "yacht...

read more
Do You Need a Sales Tax Automation Consultant?

Do You Need a Sales Tax Automation Consultant?

a If you're looking into sales tax software options, don't forget to consider how you're going to get that software up and running. Just because you signed a contract and have the installation files in your possession doesn't mean you're ready to use...

read more
South Dakota and Grocery Sales Tax

South Dakota and Grocery Sales Tax

a South Dakota is one of three states in the Union that charges the same sales tax rates for groceries as for other goods. Proposals to reduce or eliminate sales tax on groceries have come up in nearly every legislative session, including this year's,...

read more