by David Gray
As Louisianans returned to work this week after the Thanksgiving holiday, many people no doubt took advantage of “Cyber Monday,” the day when workplace productivity lags as people go online to search for Christmas bargains. But the win for Louisiana shoppers is a loss for state and local governments, because federal law does not allow state and local governments to collect taxes on Internet subscriptions and some online purchases. That caused Louisiana’s state and local governments to forgo more than $500 million in 2012 — and possibly much more in the current year, as online shopping became more popular.
These are dollars that could have been invested in higher education, health care, or to chip away at Louisiana’s chronic road repair backlog. Or it could have reduced the state’s chronic reliance on piecemeal, one-time revenues to keep the budget in balance.
The federal ban on taxing Internet service — called The Internet Tax Freedom Act — costs Louisiana $140 million in potential tax collections in 2012. The Center on Budget and Policy Priorities notes that this figure is likely much higher today as more people sign up for home and/or mobile Internet access, and as more consumers switch from taxable cable TV service, landline phones, and music CDs to cheaper (or free) alternatives they can obtain via the Internet, such as Skype and Spotify.
Allowing state and local governments to tax Internet subscriptions won’t stop users from using the Internet. Nor will it discourage tech companies from growing and innovating. A prime example of this fact is Texas, which collected $270 million in 2012 from Internet subscription taxes and has a booming tech industry in Austin.
The Supreme Court established the ban on taxing some Internet purchases when it ruled in 1992 that a state cannot require merchants to collect sales taxes from residents when the merchant lacks a “physical presence” in the state. While consumers are still legally required to pay due taxes directly to the state, few do. And most states, including Louisiana, are unable to force residents to pay their taxes because states don’t track residents’ online purchases. This results in millions of uncollected tax dollars annually.
A study by the University of Tennessee estimates that Louisiana and its local governments lost nearly $400 million in 2012 from foregone Internet sales tax revenues. Like the Internet subscription taxes, the lost Internet-sales taxes are expected to grow significantly as more consumers turn to the Internet to purchase every day goods like toothpaste and major goods like a new truck.
In addition to boosting state revenues, allowing state and local governments to tax Internet subscriptions and online sales promotes tax fairness. Currently, small businesses must collect sales taxes, but large online retailers don’t. Customers shopping at Walmart are forced to pay sales taxes, but those shopping at Groupon.com don’t. People making phone calls using Version pay sales taxes, but callers using Skype don’t.
Congress could give Louisiana and local governments the option of taxing Internet subscriptions and sales by allowing The Internet Tax Freedom Act to expire and passing the proposed Marketplace Fairness Act. Until those actions occur, the Louisiana Legislature can proactively take steps next year to chip away at the problem by passing a law that requires online companies to collect sales tax if it has an “affiliate” in Louisiana. Affiliates are businesses that link to the Internet retailer from their website and receive a commission when readers click on the link and then make a purchase at the retailer’s online store. Ten states have adopted versions of this “Amazon law,” and it has consistently been upheld in courts.