"What If...?" reports

              Morrison Institute for Public Policy 1
What if Arizona charged sales tax on retail Internet sales?
Arizona might have millions more in its coffers if it could better tap the thousands of electronic
transactions between buyers and sellers. With the sales tax Arizona’s most important revenue source
and U. S. online retail expected to grow to $ 335 billion in 20121, getting a greater return on “ click to
shop†is more attractive than ever. A recent University of Tennessee study estimated that state and local
governments nationally did not
receive $ 7.2 billion in sales tax
revenues in 2007 from online
transactions. The figure is
predicted to rise to $ 11.4 billion
in by 2012. Arizona’s share was
estimated at $ 235.2 million and
$ 369.8 million respectively. 2
But a
combination of local, state, and
federal changes will be needed to
reap all of benefits possible.
As enticing as the revenue is,
capturing it is difficult. Two Supreme Court3 rulings, both pre- †Internet and the last in 1992, noted that
until Congress acts, states cannot require sellers to collect and remit sales tax unless the seller has a
physical presence, known as nexus, in the state. In other words without a real store, “ taxation of out- †of- â€
state remote sales is currently prohibited by law as unduly burdensome to interstate commerce.†4
Thus, Arizona’s current transaction
privilege ( commonly referred to as sales
tax since the business passes it on to
consumers) and use tax policies address
online sales in a limited way only. 5 The
transaction privilege tax is a general sales
tax in which the seller is responsible for
remitting the tax. 6 Businesses collect
taxes for online purchases when a
business that may be headquartered out
of state has a store in Arizona. In turn, a
use tax is a sales tax imposed on goods
purchased outside a state for which state
sales tax has not been paid. 7
1 According to Forrester Research,
Internet
purchases from a vendor without nexus
2 Bruce, Donald, J., William F. Fox, William B. Stokely, LeAnn Luna, State and Local Government Revenue Losses from Electronic Commerce,
University of Tennessee, April 13, 2009.
3 National Bellas Hess v. Illinois ( 1967) and Quill Corp. v. North Dakota ( 1992)
4 Internet and Remote Sales Tax Collection: The Application of the Streamlined Sales Tax Statute in Arizona, Transaction Privilege Tax Research
Committee, Citizens Finance Review Commission, August, 29, 2003.
5 Joint Legislative Budget Committee’s 2009 Tax Handbook
6 Riding the Fiscal Roller Coaster: Government Revenue in Arizona, Appendix 3, Glossary, W. P. Carey School of Business, Arizona State
University, 95th Arizona Town Hall, November 2009.
7 Riding the Fiscal Roller Coaster: Government Revenue in Arizona, Appendix 3, Glossary, W. P. Carey School of Business, Arizona State
University, 95th Arizona Town Hall, November 2009.
Total State and Local Sales and Use Tax Revenue Losses from E- †Commerce Sales
($ millions), Arizona and Selected States, 2009
$ 2007 $ 2008 $ 2009 $ 2010 $ 2011 $ 2012 Six- †Year Total
Arizona 235.2 250.8 225.6 279.8 329.0 369.8 1,690.3
California 1,211.2 1,291.6 1,162.1 1,441.1 1,694.4 1,904.5 8,704.8
Colorado 109.9 117.1 105.4 130.7 153.7 172.7 789.5
Idaho 29.5 31.4 28.3 35.1 41.2 46.4 211.9
New Mexico 76.6 81.7 73.5 91.1 107.2 120.5 550.5
Texas 553.6 590.3 531.1 658.6 774.4 870.4 3,978.3
Utah 56.3 60.0 54.0 66.9 78.7 88.5 404.3
Washington 179.3 191.2 172.0 213.3 250.8 281.9 1,288.7
U. S. TOTAL 7,245.6 7,726.3 6,951.4 8,620.4 10,135.8 11,392.7 52,072.2
Source: State and Local Government Sales Tax Revenue Losses from Electronic Commerce
University of Tennessee, April 2009.
Morrison Institute for Public Policy 2
in Arizona are subject to use tax, but it is rarely paid. Thus, online shopping is often viewed as “ tax free.â€
Arizona and local governments miss revenue, and bricks and mortar businesses experience more
competition.
Congress has yet to act to authorize states to collect from online retailers, although federal legislation
has been introduced repeatedly. Now some observers give the Main Street Fairness Act, which is
expected to be introduced soon in the U. S. House, a better chance of passage. 8
This federal legislation
would provide the guidance every state needs on definitions and collection mechanisms.
As the Internet and e- †commerce was gaining steam early in the 2000s, states developed the Streamlined
Sales Tax Project to simplify and modernize sales and use tax collection and administration to ease the
burden on businesses and try to convince Congress allow states to tax remote sales. 9 States opt in to the
Streamlined Sales and Use Tax Agreement ( SSTA) and change their policies to conform. The agreement
is intended to simplify and harmonize tax administration for everyone. For example, the pact sets up
uniform tax definitions and exemptions. Rates are simplified, and the state takes on administration for
all jurisdictions. 10 It also sets up a voluntary compliance system that retailers can choose to join.
Approximately 1,200 retailers in
streamlined states voluntarily collect
sales tax. Those sellers have collected
over $ 468 million in sales tax for
streamlined states. 11
Arizona is not a participant in the
streamlined agreement. Sales tax is
complex in Arizona. With many rates
and exemptions, the changes needed
to join the streamlined states would
be substantial. In 2002, Arizona
passed legislation to participate. The
policy “ sunseted†and Arizona stayed
on only as an observer. The key for
Arizona’s participation likely will be
federal legislation. For Arizona, revamping its system from transaction privilege to true sales tax and
adopting the system’s broader definitions could be costly, although it may also bring in more revenue. 12
DOR estimated that conforming could cost $ 90- †120 million annually with local effects as well. In 2003,
the Transaction Privilege Tax Committee of the Citizens Finance Review Commission evaluated the
streamlined agreement for Arizona:
Pros
ô€¸ Potential increased state and local tax revenue from remote sales, provided Congressional
approval
ô€¸ Uniform tax burden between main street and remote vendors
8 Azeff, Althea, “ The Sales Tax Buzz Top 10 Sales & Use Tax Legislative Developments of 2009,†Sales Tax Buzz, salestaxbuzz. org.
9 Internet and Remote Sales Tax Collection: The Application of the Streamlined Sales Tax Statute in Arizona, Transaction Privilege Tax Research
Committee, Citizens Finance Review Commission, August, 29, 2003.
10 Streamlined Governing Board
11 www. streamlinedsalestax. org/ index. php? page= faqs
Morrison Institute for Public Policy 3
ô€¸ Ease of administration of tax for vendors
ô€¸ Increased efficiency for administrative procedures
ô€¸ Simplification of a very complex tax system
Cons
ô€¸ Potential revenue loss from switch to sales tax from vendor- †based transaction privilege tax13
ô€¸ Potential loss of revenue due to broader definitions of existing exemptions
ô€¸ Uncertainty of revenue impact at each level of government
ô€¸ Diminished control of tax base and rates at the state and local level14
The 2003 committee concluded: “ Many states have adopted SSTA conforming legislation already. There
is much work to be done if Arizona is to move forward as well. The Commission has been asked to
review Arizona’s tax policy and systems. The SSTA is clearly one method for reform, and should be
considered further.†15
Today, the streamlined course is just one way states are trying to tap e- †commerce. New York, North
Carolina, California, and others are trying “ Amazon taxes.†These states are looking in part to expand
definitions to pick up “ affiliate†marketers, such as the ones putting up the advertising to drive shoppers
to retailers. New York has prevailed in legal battles thus far and expects to collect approximately $ 70
million by the end of 2009. Florida, Illinois, Minnesota, Tennessee, and Texas have also been considering
legislation.
16
Arizona could have its own version of an Amazon tax. Since the online giant opened distribution centers in
Goodyear and Phoenix in September 2009, the American Booksellers Association asked the Arizona
Department of Revenue to require Amazon to collect sales taxes on purchases made by Arizona residents.
Arizona is not missing all online activity however. The state collects a digital download tax
along with 17 other states. These taxes are intended to bridge the gap between buying locally and in
cyberspace. Music is the primary target.
A nationwide policy on online revenue is likely to become a reality at some point. Arizona should look
closely at its system to be ready to find the gains in this 21st commerce.
13 As noted in the CFRC report ( see endnote 8) Arizona imposes transaction privilege tax, not a sales tax. The distinction is that the transaction
privilege tax is a tax on the private vendors, but a sales tax is on the transaction and both the U. S. government and the Indian nations are
exempt from sales tax as sovereign nations. Thus, revenue could be lost.
14 Internet and Remote Sales Tax Collection: The Application of the Streamlined Sales Tax Statute in Arizona Prepared for the Citizens Finance
Review Commission p. 8
15 Internet and Remote Sales Tax Collection: The Application of the Streamlined Sales Tax Statute in Arizona Prepared for the Citizens Finance
Review Commission p. 8
16 Azeff, Althea, Online Sales Tax Roundup: Internet Cowboys & Cowgirls, Open Your Eyes, Updated April 14, 2009, Sales Tax Buzz,
salestaxbuzz. org.
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For further information:
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