Sales tax on Internet buys could help fill budget gaps

SACRAMENTO, Calif. -- As states across the country struggle with deficits well into the billions, many officials are beginning to eye sales taxes on online shopping -- which may seem like chump change but could spare countless small government programs.

In California alone, such taxes could raise at least $200 million yearly. Nationally, local and state governments could add billions to their coffers.

"We can no longer ignore an entire segment of the retail marketplace," said Pat Leary, lobbyist for the California State Association of Counties and a frequent online shopper herself.

Internet shopping is expected to climb to $40 billion this year, from last year's $30 billion, according to New York-based Jupiter Research. It could reach $105 billion within five years.

This year's tally includes $10 billion for computers and accessories, $4.7 billion for clothes and $2.8 billion for books, and much of that is untaxed.

Collecting sales taxes won't be easy, though.

Under a U.S. Supreme Court decision, a state cannot force a business to collect sales taxes unless it has a physical presence, or "nexus," in that state.

Without such a requirement, many online retailers balk at having to compute the hodgepodge of local and state sales taxes across the nation. Most customers, in turn, duck their duty to pay the sales tax themselves and most states don't go after them.

Though Congress could authorize states to collect these taxes for other states, lawmakers have never done so and in fact have approved a moratorium through Nov. 1, 2003, on Internet-only taxes, including a streamlined sales-tax structure that would apply only to e-commerce.

Now, the issue is taking on fresh urgency in state capitals, where last fiscal year governors collectively sliced $13 billion from state programs and are preparing to whack billions more, according to the National Governors Association.

California's Legislative Analyst's office concedes the state -- which has a projected $35 billion budget deficit -- has few options if Congress doesn't change its tune.

But the state can at least force retailers with stores in California -- such as Borders and Barnes & Noble bookstores -- to collect taxes on Internet sales to state residents. Those stores currently do so for a few states, but not California.

Two years ago, when the state had a huge surplus, Gov. Gray Davis vetoed a bill with such a requirement, saying it would send the wrong message to an emerging marketing medium and robust job generator.

Now, facing a record shortfall, Internet sales taxes are among many options on his table, Davis spokeswoman Hilary McLean said.

The estimated $200 million from online sales taxes could, for instance, spare a controversial cut that has been proposed: $201.8 million in public health care for the poor. Or revenues could be spread out to reduce the magnitude of cuts in several programs.

Wide-ranging estimates

Estimates vary widely on how much governments are losing.

One widely cited study by the University of Tennessee says states, cities and counties nationwide lost $13.3 billion in revenue last year from uncollected e-commerce sales taxes.

That's about 3 percent of total sales tax revenues that year, a percentage projected to increase to 6 percent by 2006. For a handful of states, it could approach 12 percent by 2011.

Another study, for the Utah-based Institute for State Studies, predicted annual losses up to $45 billion by 2006. By that analysis, California last year lost $1.75 billion in revenues, while Texas and New York followed with about $1 billion each.

Many states are trying to make it easier for companies to compute online sales taxes for them.

Utah Tax Commissioner R. Bruce Johnson hopes within a year that at least 10 states will create a simple, single statewide sales tax rate. He has tried to enlist Wyoming, North Dakota, Ohio, Michigan, Florida and North Carolina in his campaign.

Meanwhile, California and other states are feeling pressure to get more aggressive. One coalition of police and fire departments and local chambers of commerce has suggested the state should first collect more sales taxes before raiding city hall treasuries.

------

On the Net

University of Tennessee study: www.statestudies.org

California Commission on Tax Policy in the New Economy: www.caneweconomy.ca.gov

Survey of state efforts to simplify sales tax structures: www.geocities.com/streamlined2000