The Effects of Internet Sales Tax on the State Budget in California - Research Paper Example

 The Effects of Internet Sales Tax on the State Budget in California Abstract This paper is a discussion on the effects of internet sales tax in California, as a way of raising revenue. California experienced a tax free trade online, until recently when the senate passed a new bill to tax this kind of trade. This was because it would increase revenue and improve the economy. This law has had positive and negative effects on the people and economy. Some of the advantages of taxation include increased employment and improved economy. The main disadvantage comes from the fact that only the state that has the business benefits. The government previously lost revenue due to uncollected tax from internet sales and has come up with ways of compensating this by introducing taxes for sales made online. This has improved the state’s budget. Its projected revenue has increased from the original estimate of $180,000 to $500,000. In regard to this idea, online business giants have responded differently. While some have taken the law positively and implemented it, others are against the idea. For example, Amazon has taken the law positively, while EBay is against the whole idea. Keywords: California, budget, tax, internet sales tax, economy, law Introduction The collection of sales tax on purchases made over the Internet has been a source of ongoing debate and controversy. Internet sales taxes are taxes that are collected from purchases that are made online. A distinction must be made between sales taxes and use taxes. Sales taxes are collected at the time of purchase, whereas use taxes are excise taxes that a consumer is expected to report and pay when they file their tax returns. Most recently, the general rule regarding sales taxes was that taxes must be collected if the company or organization has a physical presence in the state where the goods were purchased. This standard is a result of the Supreme Court decision in Quill Corp v. North Dakota. Quill was a supplier of office supplies. They shipped items to North Dakota although they had no physical presence there. The state of North Dakota attempted to assess a sales tax to in-state sales. As a result of the trial, the Supreme Court ruled that a company must have an in-state presence in order for that state to collect Internet sales tax. An in-state presence can be qualified in four primary ways. The first is if the company maintains a warehouse in that state. Second, is if the company operates a physical store in the state. An office also qualifies as having a presence. Lastly, if there is a sales rep in the state of purchase it is considered having a presence. In addition to the rules about what constitutes an in-state presence, there are also specific rules as to which companies can be taxed as well as which types of items. Only companies that generate sales greater than one million dollars are subject to the tax. This number was originally set at 500,000 and was later raised. Items that are resale, cold packaged food and electronically transmitted items are exempt. With the introduction of the recent Marketplace fairness act, many of these rules are now being reconsidered. This piece of legislation would allow sales and use taxes to be collected on sales made by online retailers with no physical presence in their state. It is clear that this is an issue that has not yet been put to rest. Those on both sides of the issue make some valid points and bring to light important obstacles that cannot be overlooked. This paper will illustrate some of the issues and provide an examination of some the key arguments that must be considered. A particular emphasis will be placed on the fiscal impact that the policy will have regardless of the final decision that is made. Why was the Law Proposed? The law was proposed several years ago, but the senate rejected the proposed bill. In 2013, the Bill was proposed again and this time, it was accepted and it became a law. Many states in the United States had already implemented the law apart from California. Recently, the law was implemented in California. California is struggling to widen its budget, as it has lost a lot of revenue. The law was passed to ensure that goods are taxed once, rather than taxing them each time sales are made (Bernan, 2008). This form of revenue is expected to bring about $317 million each year (Auerbach, 2011). Officials claim that this will be a major boost for the economy. This law was thus proposed to boost the state’s economy. How long has it been in effect? The internet shoppers had been enjoying tax free shopping online. But in 2013, California passed a bill to over 200 electronic retailers like Amazon, EBay and overstock to tax their customers. To this day, the law has been in effect for about a year and a half. The bill aims to collect sales tax on all online purchases made by their residents, regardless of the online medium or physical presence in the state (Bernan, 2008). While some have taken it positively, others are opposed to the new law. How is California’s economy different today? The internet sale tax has accounted to about 33% of the state revenue (Lehr & Pupillo, 2009). The Government has had concerns about this taxation; it fears future losses exceeding up to $20 billion (Goolsbee & Zittrain, 1999). The economy has continued to improve, with an increase in the budget allocation. These have boosted small businesses like local retail shops and improved the health facilities, road network and other public facilities. There is increase in employment. The large online retailers have made the small businesses lose clients. Employment rate has been boosted as online retailers start their own businesses locally. Pros and cons of internet sales tax The advantages of internet sales taxation include economic gain, preventing loss of revenue, and eliminating unfairness with retail stores. Taxing online sales benefits the economy. As mentioned earlier, online sales account for about 33% of revenue. Lehrand and Pupillo state that, this taxation funds schools, road projects, and public hospitals and helps fund good governance (2009). Tax collected will help the needy children and improve the lives of people (Lehrand & Pupillo, 2009). This form of taxation has helped the Government improve the states, as the annual budget increases. Loss of needed revenue is prevented when taxes are enforced on Internet commerce. Goolsbee and Zittrain assert that for local and state government finance, state taxes are of utmost importance (1999). For state governments, internet sales taxes are the largest sources of revenue and in overall tax revenue, they come second. Goolsbee and Zittrain add that “the modest costs of not enforcing taxation on internet sales numbers illustrates why the advocates immediate enforcement consistently invoke revenue loss projections from well into the future” (1999, p. 420). According to Goolsbee and Zittrain’s projections, if internet sales continued to grow at 70 percent each year from 2003 without the presence of taxation on them, “by 2007, the revenue loss would amount to as much as 10 percent of total sales tax revenue” (1999, p. 420). In eliminating unfairness with retail stores, enforcement of taxes on Internet commerce becomes a plus. This is due to the fact that without internet sales tax, internet sellers enjoy unfair advantages. Goolsbee and Zittrain point out that “if consumers, for example, would prefer to buy from a local store but buy online only to avoid taxes, the tax is creating an inefficiency” (1999, p. 420). Jurinski gives an example by stating that “if a buyer has the option of buying a $100 item in a local ‘brick and mortar’ store in a state with a 7 percent sales tax or over the internet, the buyer can avoid paying an extra $7 in tax ($100*7%) by buying online” (2012, p. 86). Introducing taxes for ecommerce creates a level playfield for these kinds of businesses and those conducted physically. Some of the disadvantages of internet sale tax include the fact that fewer people are buying goods online and this has resulted to loss of potential revenue, only the state where the online retailer is present benefits and the difficulties that come with enforcing and managing such taxes. After the introduction of taxation, online retailers have lost many customers and this will make it difficult for them to meet the taxation rate imposed on them. This has ultimately led to loss of potential revenue. Secondly, the taxation only improves the state in which the online retailer is found in (Lehrand & Pupillo, 2009). This move was introduced when “a 1992 US Supreme Court case held that states could not force mail order businesses to collect use taxes from purchasers unless the seller had a physical presence in the purchaser’s state” (Jurinski, 2012, p. 86). As a result of the taxation, some states benefit because the retailers are found in their states. Finally, implementing internet sales tax is not only costly but difficult as well. According to Goolsbee and Zittrain, “simply calculating and remitting the applicable taxes to every jurisdiction from which a customer orders could be quite burdensome, particularly for the smaller ‘pushcart’ type sellers thought to populate the Internet market space” (1999, p. 424). It is also difficult to identify transactions and individuals in an electronic environment. For example, when the customer and merchant stay anonymous, and transact through electronic cash that is hard to trace, serious problems arise in implementing taxes. Steps taken by the state of California to compensate for loss of revenue Measures have been taken to compensate for lost revenue. The California Government has ventured into other different avenues of getting back the lost revenue. Internet sale tax was a method used to reclaim back the lost revue. As earlier discussed, internet tax was an effective way of improving the state’s budget (Lehrand & Pupillo, 2009). The state had been struggling to widen its budget gap. California has been considered to have the highest sales tax having $317 million in revenue (Lehrand & Pupillo, 2009). According to the state Board of Equalization, California collected up to $349.2 million on revenue from online sales of 45 retailers (Mahoney et al., 2014). The government has imposed high tax rates among its citizens (Root, 2013). California has increased the taxation rate and people like Tiger Woods and other athletes have relocated to other states. Most online businesses were started in California because it was an online free zone, but when the taxation started, many people stopped purchasing their goods online. Has California collected the original projected amount of internet sales taxes? The current tax revenue loses large amounts of money and this might affect the future. Online trade has risen up to 10% of the sales tax revenue (Brennan, 2012). Internet sale tax has caused a loss of $ 6 billion, but with the proposed law, the projected revenue will amount to $180 billion (Brennan, 2012). But the question is has California managed to reach the projected internet revenue? California has managed to raise $500,000 on internet sales; this is more than what had been projected. Impact that the new law had on internet giants like Amazon and EBay The new bill had a positive impact on Amazon, as it accepted it and implemented it. EBay didn’t take this positively and was against the new law; it claimed that this law didn’t protect the small businesses (Brennan, 2012). Amazon has continued to increase its revenue, but this has not been easy because many customers and retailers left as a result of the new law. This may have affected the business, but major internet giants have come up with new ideas to ensure that their customers stay. They managed to cut down advertising costs for their customers. This ensured that businesses continue to grow and revenues increase. Conclusion The people of California enjoyed internet tax free sales for a long time. While many states introduced taxes for sales made online, California did not adopt the law until recently, when it passed a bill taxing online sales. Officials estimated that this taxation would amount to about $500,000 annually. This kind of taxation has advantages and disadvantages. Among the advantages is increase in employment and improved economy, while on the downside, there has been loss of clients. Big giants like EBay and Amazon have been affected by this new law. Nevertheless, Amazon agreed with the new law and implemented it, but EBay has opposed the law despite implementing it since it was a requirement. Generally, the internet sales tax has changed California’s economy and improved it greatly. Reference List Auerbach, A. J. (2011). Consumption Tax Options for California: California: Public Policy Institute of California. Bernan. (2008). Career Guide to Industries, 2008-09. Washington DC: US Government Printing Office. Brennan, J. (2012). Libertarianism: What Everyone Needs to KnowRG. New York: Oxford University Press. Goolsbee, A., & Zittrain, J. (1999, September). Evaluating the Costs and Benefits of Taxing Internet Commerce. National Tax Journal, 52(3), 413-428. Jurinski, J. J. (2012). Tax Reform: A Reference Handbook. Santa Barbara: ABC-CLIO, LLC. Lehr, W. H. & Pupillo, L. (2009). Internet Policy and Economics: Challenges and Perspectives. New York: Springer Science + Business Media, LLC. Mahoney, L. et al. (2014). States See Little Revenue from Online Sales Tax Laws, Keep Pressure on Congress. Retrieved from http://www.bna.com/states-little-revenue-n17179881226/. Root, W. (2013). The Ultimate Obama Survival Guide: How to Survive, Thrive, and Prosper. New York: Regnery Publishing. Read More