With Online Sales Booming, States Struggle to Capture Sales Tax

Part of an occasional series of stories on how states are overhauling tax codes to adapt to a new economy.

Imagine having $26 billion dangling just in front of you, only to have it repeatedly jerked away. That’s the situation facing the 45 states that have a sales tax, as people do more of their shopping from the comfort of their couches, rather than in retail stores.

The $26 billion is what states estimate they could collect in sales taxes on products sold remotely — online and via mail order. But because taxes are not collected on most remote sales — with the exception of most Amazon sales — states aren’t capturing those potential billions in revenue.

“Obviously e-commerce is becoming more important every day,” said Andy Gerlach, secretary of revenue in South Dakota, which set the pace in 2016 in attempting to capture sales tax from remote retailing. “You see the stores that have closed or downsized — J.C. Penney and a lot of others in this area. If you can’t tax e-commerce, it’s going to continue to erode the taxes your state is going to take in. We need a tax policy that keeps up with that.”

Taxing online sales is just one of the ways states are trying to keep up with the modern economy by reforming their tax codes, which have not been overhauled in decades.

Bills to tax remote sales were filed in at least 30 states this year, according to the National Conference of State Legislatures. “It’s been hotly discussed,” said Max Behlke, director of state budget and tax policy at NCSL. With many states facing budget deficits, “they are looking either to continue to cut programs, raise revenue somewhere else, which is always unpopular, or shore up revenue they should be collecting” like remote sales taxes, he said.

In 2017, six states have enacted laws or set tax rules that address the lack of tax on remote sales — Alabama, Indiana, North Dakota, Virginia, Tennessee and Wyoming. All but Virginia have Republican governors and majority GOP legislatures, which are not generally in favor of tax increases. But Main Street concerns about the tough competition from out-of-state sellers seem to have held sway.