Online Sales Cost Cities And Counties Billions In Taxes, Mayors Say

Jun 21, 2013
Originally published on June 21, 2013 2:53 pm

Online retail sales are cutting into tax revenue in counties and cities, according to a report issued by the U.S. Conference of Mayors on Friday. They estimate the lost revenue for America's largest cities and counties came to about $2.8 billion for 2011 and 2012, combined.

The mayors' group released the report as they hold their annual meeting in Las Vegas. The topic of tax revenues has come up for discussion, particularly the Marketplace Fairness Act, a U.S. bill that would allow states to collect sales tax on online transactions. The report estimating lost revenues is available online.

Among the cities studied, New York City is estimated to have missed out on the most amount of money, at more than $205 million in 2012. Phoenix follows with $18 million; Chicago is next, with $17 million.

In terms of counties, the report prepared for the conference by IHS Global Insight says that Los Angeles County could have had an extra $82 million if it were able to collect sales taxes in 2012. Chicago's Cook County was next, at $48 million; six other counties were estimated to have lost out on more than $20 million in tax revenue.

In the cities and counties that the study focused on, the local governments collect from 0.1 percent to around 6 percent in sales tax, in addition to state taxes. The analysis estimated the amount of taxes that were not assessed on online sales "by determining the share of e-commerce originating from a given county or city and applying the appropriate local tax rate," according to the report.

Sales that were made through more traditional sources, like catalogs, were not included in the calculations.

The study's authors say they used the same methods researchers developed in a 2009 report titled "State and Local Government Sales Tax Revenue Losses from Electronic Commerce," compiled by business professors at the University of Tennessee.

Philadelphia Mayor Michael Nutter, the president of the U.S. Conference of Mayors, has said he sees taxes on online transactions as a way to pay for infrastructure repairs, and to stimulate economic growth.

"With federal funds to local governments dwindling and few other sources available to municipal leaders for raising revenue, this measure will provide a badly needed funding stream so we can better serve our residents," Nutter said last month, "from fixing crumbling roads and bridges to funding schools and first responders to maintaining and upgrading water systems."

The mayors' support of the Marketplace Fairness Act echoes that of many brick-and-mortar retail groups, which have complained that customers use their stores to get the look and feel of products — which they then buy later on bargain websites.

Since a 1992 Supreme Court ruling, retailers have been allowed to skip collecting sales tax on transactions with customers in states where they have no physical presence.

As we reported earlier this week, Amazon has cut ties with its affiliates in Minnesota in a move it blamed on the state's new sales tax law that takes effect in July. The company said it would return to Minnesota if the Marketplace Fairness Act were enacted.

But not every online retailer is in favor of the measure as it is currently written. Critics say it would impose heavy burdens on small online retailers, who could face compliance issues and varying tax rates in states far from their base of operations. Others say the bill's minimum cutoff of $1 million in sales is too low.

In a statement to Congress, online auction site eBay has urged "the Small Business Administration to determine the threshold that accurately reflects a small business," noting that the agency's current threshold for giving loans to online retailers is $30 million.

The company goes on to say that it believes "small businesses that use the Internet are not the ones jeopardizing offline small businesses. The greatest threat to any small business retailer is its mega-large competitor."

But the debate over the Marketplace Fairness Act is anything but simple. As Time reported last month, the Alliance for Main Street Fairness group has attacked eBay for its position against the bill, saying the company is only hoping to protect the largest businesses that use its auction site.

The bill has been approved by the Senate and is currently in the House Judiciary Committee. The panel's chairman, Rep. Bob Goodlatte, R-Va., has said he doesn't think the bill's tax collection process "is sufficiently simplified yet."

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