United States: New Study By UAB Professor Analyzes Collateral Damage From Internet Sales Tax Non-Compliance

Last Updated: September 29 2014
Article by Bruce P. Ely and J. Sims Rhyne, III

In 2012, Dr. Robert A. Robicheaux, well-respected Professor in the Department of Marketing, Industrial Distribution and Economics at the University of Alabama at Birmingham's Collat School of Business, issued a report titled "Estimates of Alabama Losses Due to E-Commerce." The detailed report analyzed Alabama's economic losses from purchases by its businesses and consumers from out-of-state vendors who did not remit state and local sales or use taxes. In this new report, "Tax Collections on Online Retail Sales: The Rest of the Story," Dr. Robicheaux not only updates his calculations from his previous report, but also focuses on lost jobs, lost income tax revenue, the circular effect caused by decreased local consumer spending, and stagnant sales tax revenues.

Dr. Robicheaux commented on the updated findings, saying, "The sales tax advantage enjoyed by online retailers who do not collect or remit use taxes that are owed is bad enough. The Marketplace Fairness Act and a level playing field is about much more than just sales and use tax revenue losses. Alabama and other states are losing jobs, household income, and retail enterprises as B2C e-commerce continues to grow. Our retail enterprises are not just moving from downtown to our suburbs; they are moving out-of-state, and those businesses will not support our communities in many significant ways, if at all."

The report studies the effect purchases made in a local store have on the local community. Consumers support the retail vendors whose families depend on their business for their economic well-being. Local retailers employ workers whose families depend on the success of the enterprise, and that employment provides full-time workers with benefits such as healthcare and retirement security. Also, local retailers "buy everything from basic utility services to a variety of business products . . . from other local businesses." Those same retailers pay municipal, county, and state taxes and fees, and many local businesses are strong supporters of their community, local organizations, and churches. Finally, local businesses tend to create civic leaders for the community.

The new report projects that Alabama's online retail sales in 2013 were approximately $3.03 billion. While the report's corresponding projection of lost sales and use taxes was somewhat lower in the years studied in the previous report, the projected revenue loss in 2013 from untaxed sales alone was still quite substantial—$126 million. Next, the report turns its focus to lost jobs, lost income, and the resulting decrease in local retail spending. The report estimates that Alabama lost approximately 5,000 jobs in 2013 due to untaxed online sales, which in turn caused household income and state income tax revenues to drop. The latter figure was estimated to be an annual loss of between $3.4 and $3.7 million, caused by an estimated loss of household income of $112.5 million. Lost retail sales as a result of decreased household income were projected at $33.1 million and another approximately $2.8 million in lost sales and use tax revenue for 2013, using an average 8.4% sales and use tax rate. Obviously in the major cities and suburbs, where the combined rate is typically 9 or 10%, lost sales tax revenue was greater than the state average.

The report also projected losses suffered by the state's largest county, Jefferson County, and the state's largest metropolitan area, Birmingham/Hoover, and predicts that states, counties, and municipalities will continue to lose jobs and various forms of tax revenue "until some form of marketplace fairness or equity [legislation] is implemented." Dr. Robicheaux predicts that will "likely happen in the near future." Readers are encouraged to review the full report. It is available online from State Tax Notes or from any Alabama member of our firm's SALT Practice Team.

"Tax Collections on Online Retail Sales: The Rest of the Story" by Robert Robicheaux republished with permission. This article was first published in State Tax Notes on September 15, 2014.

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.

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