Online Sales “Leakage” Costing WA About $740M Over Two Years—Even With Amazon Collecting Sales Taxes

3/18/11Follow @curtwoodward

[Updated at 4:10 p.m. with more statistics and a correction, see below] Washington is one of the few states where Amazon.com collects sales taxes and sends the money to the government. But Washington is still losing hundreds of millions of dollars each year to sales tax “leakage” from online retail sales.

In Thursday’s forecast of public finances, Washington’s Economic and Revenue Forecast Council said state government is missing about $740 million in uncollected sales taxes during the next two-year budget cycle, which runs from mid-2011 to mid-2013. (Here are the relevant slides.) That represents about 5 percent of projected retail sales tax collections in the budget cycle. It’s also equivalent to about 14.5 percent of the projected $5.1 billion budget deficit over the same period. [Added percentage of projected sales tax collections.]

As we’ve previously written, Seattle-based Amazon (NASDAQ: AMZN) is currently engaged in a multi-state game of chicken with officials in other states who want to get a bite of the online sales taxes they’re missing under the current national sales-tax rules. The Wall Street Journal had an update on the situation Thursday, looking at the role that brick-and-mortar retailers have played in the political campaigns to press Amazon toward collecting taxes in more states. Amazon has largely resisted.

Amazon does have a clear obligation to collect taxes on its sales within Washington because its headquarters are here, and the company fulfills that responsibility. But even with that presumably significant stream of sales tax (the state can’t discuss individual taxpayer information), Washington’s Revenue Department estimates that it’s missing out on about half of the revenue that should be collected for online sales.

If a shopper buys something online and doesn’t pay sales tax, they’re still technically required to pay the equivalent “use” tax. Individuals are supposed to fill out a form and send in a check, but almost nobody does. The state performs audits on a slice of businesses to enforce use tax payments on that half of the equation, but there are surely some businesses that aren’t paying use tax on the things they buy online or out-of-state.

The issue for online retailers, however, isn’t whether they pay the sales taxes themselves. It’s whether they collect sales taxes from the consumers and send that money back to the state. Long story short: Federal law says a retailer has to have some presence in a state before the government can deputize that retailer as a tax collector. This policy generally pre-dates online sales—think catalogs.

Thursday’s state revenue report also says the pace of Internet purchasing in Washington is on a steady climb—it’s responsible for about a fifth of the nation’s overall retail sales growth in the past year. You can see the entire forecast from the state’s chief economist, Arun Raha, at the council’s website—it’s usually a good high-level review of where the state’s economy is headed. [Corrected that online retail purchasing growth statistic is on a national basis, not state.]

In Washington, one of the few states without an income tax, government basically lives on sales taxes. Sales taxes are the biggest single stream of state tax revenue in Washington—projected at about $14.8 billion over the next two-year budget, a little less than half of all tax revenue, according to the state Office of Financial Management. The state’s other two main tax streams are property taxes, which voters have slapped limits on, and a business-and-occupation tax on the gross receipts of businesses. [Added specific statistic about projected state sales tax collections over the next biennium.]

The latest effort to establish a personal income tax—as many readers surely remember well—was shot down last year, after notable disagreements among major tech-business figures like Bill Gates, Nick Hanauer, Jeff Bezos, and Steve Ballmer. It will be interesting to see if state officials here try to get more aggressive about a national-level solution for collecting more online sales taxes, as lawmakers seek ways to plug some gaping budget holes.

Curt Woodward is a senior editor for Xconomy based in Boston. Email: cwoodward@xconomy.com Follow @curtwoodward

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  • Anonymous

    It would be powerful to know what percentage of the states’ TOTAL sales tax collection $740M represents. It sounds like a lot, but without context of what total sales taxes are, I don’t know whether or not to care.

  • Mr Nobody

    The porblem with the state budget is that they legislators have spent like drunken sailors for way to long. We need to cut spending to match revenue, not raise revenue to match spending.
    This is not how you operate your home, this cannot be how you operate a state or country!

  • http://www.xconomy.com/author/cwoodward/ Curt Woodward

    @Anon – Great question. I am tracking that number down. It wasn’t in the main source docs that I can see.

  • http://www.xconomy.com/author/cwoodward/ Curt Woodward

    @Anon – I added that data, see the paragraphs noted with bracketed italics. Cheers.

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