United States: New Report Predicts $1 Billion Revenue Loss To State And Local Governments Over Next Five Years Due To E-Commerce Sales

A newly-released study by well-respected University of Alabama at Birmingham ("UAB") Marketing Professor Robert A. Robicheaux and his research staff provides statistical evidence of the substantial amount of sales and use tax revenue that the State of Alabama and its localities lose each year to e-commerce. The study also describes the ripple effect caused when instate retailers lose those sales. Dr. Robert A. Robicheaux, Estimates of Alabama Losses Due to E-Commerce (Feb. 21, 2012) (Available here). The study shows that a significant amount of sales and use tax revenue owed by consumers to the State of Alabama and its local governments is lost due to a lack of compliance by consumers and the government's inability to force remote sellers to charge and remit sales tax.

According to the landmark study, this results not only in substantial sums of lost sales and use tax revenue, but it also lowers Alabama's economic output, which in turn costs Alabama residents jobs and reduces their household income, thereby reducing the State's income tax revenue. The study concludes that the loss of sales/use tax revenue from online purchases alone will cost the State and local governments more than $1 billion over the next five years, unless federal laws are enacted to prevent it.

As the well-documented study confirms, e-commerce and online purchasing have become a significant part of the U.S. economy, as well as the Alabama economy. In 2009, the U.S. Bureau of Census estimated that national e-commerce sales amounted to approximately $3.4 trillion. Those sales can be divided into two categories: business-to-business ("B2B") and business-to-consumer ("B2C"). While B2C e-commerce in 2009 only accounted for about $145 billion, or 4 percent of total retail sales, it has been growing at double digit rates in recent years.

The study goes on to estimate that e-commerce sales by remote sellers to Alabama consumers exceeded $34 billion in 2011. Of that amount, approximately $2.3 billion of the sales were B2C sales and the remaining sales were B2B sales, which have a compliance rate that the study estimates to be between 75-80 percent. Not surprisingly, and perhaps too conservatively, the study reports that only about half of the consumers in B2C sales remitted any sales or use tax on their purchases. Because of this compliance failure, the study concludes that Alabama and its local governments are losing millions of dollars in sales and use tax revenue annually. According to Dr. Robicheaux, "There is an urban myth that if you buy something on the Internet, then you don't have to pay [sales] taxes. That is false, and it hurts everyone in Alabama."

The study highlights two reasons for the lost revenue. First, Quill Corp. v. North Dakota (1992) and its predecessor, National Bellas Hess v. Illinois (1967), prevent states from requiring remote, nonnexus sellers to collect and remit sales tax owed by Alabama buyers on their purchases. Second, the study concludes that some remote sellers purposefully avoid creating nexus in order to avoid having to collect applicable sales taxes, which not only reduces their administrative costs, but, more importantly, gives them a competitive price advantage over sellers with nexus in the state.

In addition, the study also notes that few retail purchasers voluntarily comply and pay the consumer use tax they owe, either because they don't understand their compliance obligation or they specifically avoid payment of the tax by purchasing products through remote sellers. State legislators, the Alabama Retail Association (ARA), and even law review commentators have recently noted that the lack of compliance and resulting revenue losses has become a major fiscal problem for Alabama, and will continue to negatively affect state and local governments and funding for public education as e-commerce continues to grow.

E-commerce sales will continue to expand and, as the study predicts, will soon outpace the growth of traditional retail and B2B sales. Using a conservative estimated growth rate of only 2 to 2.5 percent, the study predicts lost tax revenue will rise from $263 million in 2011 to $299 million in 2016. (See Table 1 below). Using a more likely growth rate of 6 to 7.5 percent, the study predicts total tax revenue losses growing from $309 million in 2011 to $398 million in 2016. (See Table 2 below).

At either growth rate, the amount of lost revenue is staggering. Moreover, these estimates may be too conservative because the report employed an average combined sales tax rate of just 8.33%, even though the average, population-weighted combined sales tax rate in Alabama is now approximately 9%. According to a recent Tax Foundation study, the combined state and local sales tax rate in Alabama ranks as the 6th highest in the country.

Another problem addressed by the new study is the effect of the "lost" retail sales on Alabama's economy. Every dollar of retail sales that is lost because a purchaser chooses to buy from a remote seller, rather than a local Alabama retailer, directly impacts Alabama's economy. Indeed, the study estimates a loss of $2 billion or more in traditional retail sales and a resulting loss of 3,500 to 4,000 jobs for Alabama workers each year. The study also estimates that in 2012, $1.3 billion in household income and $433 million in additional retail sales to in-state businesses will be lost. (See Table 3 below). If the growth rate of online retail sales is sustained through 2016, the study predicts that losses will increase to $2.1 billion of income and $717 million in local retail sales in 2016. (See Table 4 below).

The study argues that noncompliance should not be permitted because it gives remote sellers a competitive advantage over Alabama and its local governments. The study notes that when in-state sales are lost to e-commerce, it creates a ripple effect, adversely affecting commercial property owners and developers, banks, construction trades, advertising agencies, Alabama manufacturers, and other businesses in Alabama. Not surprisingly, Professor Robicheaux calls for marketplace fairness and for Alabama to join in that debate.

The Alabama Retail Association (ARA) applauded the release of Dr. Robicheaux's comprehensive study, with its President Rick Brown stating:

This report makes clear that for every $1 million in retail sales Alabama retailers lose to online sales that go untaxed, the state loses 22.5 jobs. Lost jobs, means lost income, which means even more lost retail sales, lost sales taxes and lost income taxes. Alabama can't afford to continue to lose billions in sales, millions in taxes, and thousands of jobs. It is time for Congress to quit picking winners and losers when it comes to which sellers must collect sales taxes. It is time for all retailers to be required to collect sales taxes, whether their stores are on Main Street or along the information highway.

For more information on Professor Robicheaux's study, please click here.

Note: The authors advise the Alabama Retail Association and other business associations on streamlined sales tax issues and related matters.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Bruce P. Ely
 
In association with
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
Accounting and Audit
Anti-trust/Competition Law
Consumer Protection
Corporate/Commercial Law
Criminal Law
Employment and HR
Energy and Natural Resources
Environment
Family and Matrimonial
Finance and Banking
Food, Drugs, Healthcare, Life Sciences
Government, Public Sector
Immigration
Insolvency/Bankruptcy, Re-structuring
Insurance
Intellectual Property
International Law
Law Practice Management
Litigation, Mediation & Arbitration
Media, Telecoms, IT, Entertainment
Privacy
Real Estate and Construction
Strategy
Tax
Transport
Wealth Management
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.