Fair Is Fair: The Marketplace Equity And Fairness Facts, And The $23 Billion Issues

The Issue

Chances are, you know someone who purchased something online today, or at least within the last few months. And, unless the online or electronic retailer (e-tailer) from whom you made the purchase has some physical presence in your state (or your state has no sales tax),1 the purchaser probably did not pay state sales tax on that purchase or even think to record the price of the merchandise for purposes of self-reporting and paying a use tax.

Use tax? What is a use tax? A use tax is an ad valorem (i.e., according to value) tax on the use, consumption or storage of tangible personal property or merchandise, which is often payable when a consumer orders merchandise from an out-of-state retailer; a use tax is usually at a rate comparable to the applicable sales tax.2 Many people shop online precisely because they do not think they have to pay taxes (although they do), and may consider the tax due on their individual purchase to be insignificant; but, when combined with all e-tail sales, nothing could be further from the truth. In 2011, e-commerce represented 16.1% of all retail sales.3 During 2011, online sales grew 16.1% while traditional retail sales grew only 4.7%.4

Brick and mortar retailers must not only collect and remit sales taxes for the merchandise they sell, but also bear the ignominy of being the showrooms for the e-tailers that do not collect and remit sales taxes. The harm suffered extends well beyond the traditional retailer. In a time of growing budget deficits for a majority of states, many essential services (e.g., police departments, public schools, fire departments, courts) are all experiencing funding cuts. In 2012 alone, it is estimated that states will lose as much as $23 billion in uncollected sales tax revenue because e-tailers are not collecting and remitting sales taxes.5

Understanding how we reached this point is important to recognizing the necessity for, and availability of, the solution.

The Past

In 1992, three years before Amazon.com was founded, the United States Supreme Court issued an opinion in Quill Corp. v. North Dakota, 504 U.S. 298 (1992). Quill was a retailer that sold office equipment and supplies. Quill's annual sales exceeded $200 million, and its sales to roughly 3,000 customers in North Dakota totaled approximately $1 million. All of Quill's merchandise sold to North Dakota businesses or residents was delivered by mail or common carrier from locations outside North Dakota. The dispute...