Why Reports Of Huge State Sales Tax Losses Are So Wrong

With the latest report of Mississippi’s projected and utterly inflated “losses” from Ecommerce use tax not being collected, I thought I’d do a quick check.

As mentioned before, the top vendors in Ecommerce are larger, stronger and are now the vast majority of ecommerce sales.  The big are getting bigger.  Researchers don’t generally understand this and just do straight line projections and estimates.

Out of the top 15 online retailers, only 1 of the top 15 (Nordstrom) doesn’t collect sales tax for Mississippi at this time.  Most sales tax is collected, the pot of gold at the end of the rainbow the states are hoping for is just fantasy.

Retailer                                                                  sales in millions                 collects MS tax?

1. Amazon.com $79,268 Yes
2. Wal-Mart Stores Inc. $13,484 Yes
3. Apple $12,000 Yes
4. Staples $10,700 Yes
5. Macy’s $4,829 Yes
6. The Home Depot $4,267 Yes
7. Best Buy $3,780 Yes
8. QVC $3,722 Yes
9. Costco Wholesale $3,618 Yes
10. Nordstrom $2,699 No
11. Target $2,524 Yes
12. Gap Inc. $2,519 Yes
13. Williams-Sonoma $2,501 Yes
14. Kohl’s $2,367 Yes
15. Sears Holdings $2,057 yes

A Look Back At Inflated “Lost Sales/Use Taxes” Reports – Not Even Close To Reality

Just a quick post regarding the supposedly lost sales/use tax revenue.  There have been posts on the topic already regarding the guesswork and ridiculously inflated numbers of lost sales tax/use tax revenue being floated around due to remote (Internet mainly) sales.   The National Conference of State Legislatures quotes massive losses referencing the massively flawed report from Doctors Bruce and Fox. Link to the numbers:

http://www.ncsl.org/research/fiscal-policy/collecting-ecommerce-taxes-an-interactive-map.aspx#2

 

Tennessee is the epicenter of the report and has been leading the fight for the Marketplace Fairness Act.  Amazon started collecting at the beginning of 2014 for TN. Their fiscal year is June 1st.  Keep in mind that supposedly for 2012 Tennessee had estimated losses of approximately $750 million dollars, $410 million due to electronic sales.  As a point of reference, the total for ALL of Tennessee’s sales and use tax was only $590 million.  This give a pretty good indication of how crazy and off-base these numbers were.

TN Data (Sales and Use Receipts, Source : TN Department of Revenue). Rounded to nearest million.

  • 2011 – $555 million
  • 2012 – $590 million (+35 million, 6.24%)
  • 2013 – $597 million (+ 7 million, 1.18%)
  • 2014 – $630 million (+ 33 million, 5.54%) – First year (1/2 year) Amazon collecting sales tax for TN shipments
  • 2015 – $668 million (+ 48 million, 7.62%) – First full year Amazon collecting sales tax for TN shipments
  • 2016 – $686 million (+ 9 million, 1.28%) – Amazon full year of sales tax collection as well.

See the giant windfall that was being lost?  Neither did I.  That’s because the assumptions were terrible and wildly overstated and didn’t include the reality that a number of key online retailers are national chains and already collecting sales tax for most/all states that have a sales tax.  Keep in mind that most states have had increased sales tax revenue due to an improving economy, further reducing any increases due to Amazon’s new collections.

Flawed Mississippi “Lost Revenue” Study

The latest ridiculous study about how much revenue is “lost” through unpaid use taxes just came out.

The full report is here:

http://www.mississippi.edu/urc/downloads/tax_revenue_remote_sales_2017.pdf

While I’m sympathetic that hard numbers for many things are hard to come by, the assumptions used are so overstated that the report is certainly not even close.  Not only that, Amazon is now collecting sales tax for Mississippi shipments, so the real uncollected use tax on remote sales would be a small fraction of the alleged range of $105 – $122 million per year.

From the report, discussing the limitations:

“In order to determine the value of potential sales and use tax collections, the value of remote sales made to residents of the state of Mississippi is needed.  Unfortunately, this data does not exist.   While national e‐commerce data are available, it is not divided among the states.  Moreover, data regarding non‐electronic remote sales do not exist.  Non‐electronic remote purchases consist of sales through more conventional means such as telephone and mail order.  As a result of this lack of data, the very foundation of the estimation in this brief is based inherently on many assumptions and estimates

Yes, lots of guesses.  I don’t assume or claim bad faith necessarily, but I absolutely question their assumptions.

Why I believe it’s overstated?

  • They don’t grasp that many larger retail chains are dominating e-commerce and already do collect tax for online orders
  • Mississippi has the lowest median income in the entire country, 50th out of 50.
  • Assumption (they downgraded the official MS guess) that MS is 0.85% of all national retail.  They are only 0.95% of the population and have the lowest median income in the country.  I believe 0.85% is FAR too high.
  • Lowest rate of ALL states for having a credit card.  Only 51.6% of 19+ year old adults have one (in their report)
  • 2nd lowest percentage of all states of 15+ year olds who shop online (in their report)
  • 65% of MS residents have broadband internet, 18% live in a household with no Internet access – far lower than the national averages (in their report)
  • Amazon is now collecting tax for Mississippi shipments (not the authors’ fault per se)
  • Huge guesses as to how much of any interstate commerce is taxable or not. I assume much of it is for retailers for resale and non-taxable.

In short, this report will get tweeted but it’s just a series of wildly inaccurate and overstated assumptions that are not likely to be found in the real world.

Amazon Now Collecting Sales Tax For 10 More States – Almost All The Population

According to Yahoo Finance (and elsewhere)

“The states in which shoppers are now subject to sales taxes on Amazon purchases are Iowa, Louisiana, Mississippi, Missouri, Nebraska, Rhode Island, South Dakota, Utah, Vermont and Wyoming.”

This brings the total to 39 states out of 45 that have a sales tax.

Let’s make this easier: What tax collecting states does Amazon NOT collect sales tax from yet (and their percentage of the US population): Alabama (1.53%), Oklahoma (1.22%), Arkansas (0.94%), New Mexico (0.66%), Idaho (0.51%), Hawaii (0.44%), Maine (0.42%), Wyoming (0.18%).

In total, Amazon is collecting sales tax for shipments to 94.1% of the population (including not collecting where there is no sales tax).  Amazon is not collecting sales tax for shipments to 5.9% of the population that reside in states with a sales tax.

Amazon is continuing to dominate e-commerce, along with other large companies like Wal-Mart, Home Depot and other large chains that already have a physical presence in most/all states so they already collect sales tax for their sales.

So where is all this uncollected use tax that requires a cross-state power grab, such as the Marketplace Fairness Act or RTPA?  It’s not there and such a sweeping and destructive law (to smaller sites) is not necessary at all.

Use Tax Education For More Revenue – A Natural First Step? Not for Utah

From the sounds of the shrieks coming from the states regarding use tax and the necessity of a law like the Marketplace Fairness Act (MFA), you’d think that the states have done everything possible to collect their “missing” revenue.  The states have thrown around unrealistic (and frankly nonsense) numbers about how much sales tax/use tax revenue they’re losing due to the Internet and other remote retailers.  Actual sales tax/use tax revenue for the states has actually been doing fine, as shown repeatedly in this blog with hard data examples from various states’ own department of revenue’s figure on sales tax collection.

I’ve stated all along that the natural, first logical step would be for states to collect the money from their own residents.  The terrible overreach that is MFA and other similar bills isn’t required at all if states just bother to do their jobs.  IF the revenue being lost is actually anywhere near what they claim, they’d be stupid not to spend money to try and capture some of that “lost” tax revenue.  Plus, their return on their investment (ROI) should be great.  Economically, it makes zero sense for them NOT to spend money trying to collect if they believe it will bring in more money than it costs.

So I began my quest with the state of Utah for a few reasons: Representative Jason Chaffetz has tried to gather support for his version of the MFA (RTPA, covered throughout the blog), Utah is a key state trying to pass unconstitutional state laws requiring tax collection from remote retailers AND Utah seems to be a leading state in complaining about the problem.  So are they a leading state on doing something about the problem?  Or are they just a whiner?  I think you can guess the answer.

I reached Jeff Christiansen, the Assistant Director, Taxpayer Services Division, Utah State Tax Commision and asked what Utah is doing to educate Utah taxpayers on their use tax obligations.

The short answer is Utah is doing nothing.

To paraphrase, there’s a line item on some of their tax forms and if you download/have access to the printed instructions for the form it mentions use tax.  If you’re audited, use taxes would be covered there.  So nothing.

My followup question was on how much money is budgeted/spent on educating Utah state residents regarding their use tax obligations, since Utah claims it’s a huge amount of revenue they’re missing out on.

Zero.  Not applicable.

“I am not aware of the Tax Commission having any type of budget to proactively pursue consumer education using the methods you have described…such as ad campaigns, TV spots, radio and paper advertising etc.  Therefore, approaching your question number 3 from an advertising perspective – “How much does Utah spend on these efforts (if applicable)?” –  the answer would be it is currently “not applicable”.”

So Utah is spending ZERO dollars on trying to collect their state tax from their own citizens but is more than happy to foist massive actual hard costs and ongoing administrative costs on all the online retailers that would be affected by the MFA.

Utah: Get back to me after you’ve tried to do your job… then we can talk about unprecedented and intrusive national legislation that lets states reach across their borders to enforce their state laws.  Not until then.

Remote Transactions Parity Act (RTPA) – Will harm literally EVERY business in America

This is no hyperbole.  The RTPA will touch and harm every single business in America and allow 46 states to exert power over them even if they’re a tiny company in only 1 state.  To say this is an unprecedented overreach doesn’t begin to cover it.

This bill was essentially written by the Tax Certified Solutions Providers (related article here) and is crony capitalism at its worst.  The RTPA had a last minute addition to the March draft that I saw removed the Small Business Exemption (SBE) for any seller who sells through a “Marketplace”.  This is probably a huge percentage of online sellers.  Some prominent examples:

  • Amazon
  • Ebay
  • Etsy

So if you sell ANYTHING at all, any sales volume through a marketplace, no SBE for you!  Yes, channeling the Soup Nazi.

What I didn’t catch, is that after the standard SBE drops to $1 million in sales (not remote sales, any sales), it drops to zero anyway after 3 years of passing.

So every single business in America, regardless of how small they are or if they even sell across state lines, will be impacted by the RTPA.  This doesn’t just affect anyone who sells online, it affects everyone.

  • All of the compliance costs
  • All of the audit risks
  • All of the time wasted
  • All of the money flowing into CSP’s pockets
  • Even if you’re a 1 person company in 1 state.

 

This is a tax on every business in America.  It must be stopped!

 

And I guess it was hyperbole – 7 or 8 businesses will do very well if this horrific bill passes.  But we can’t all be the CSPs who basically wrote this bill.

The Remote Transaction Parity Act Won’t Touch These Foreign Sellers – Part 2

Shortly after I wrote The Remote Transaction Parity Act Won’t Touch These Foreign Sellersthere was an article in the Wall Street Journal entitled “Borders Matter Less and Less in E-Commerce” which is an excellent example of the very problem MFA and RTPA won’t address, while hammering U.S. small businesses with compliance costs and audit risks.

“E-commerce made it a breeze for a shopper to buy something from the other side of the country. Now, retailers and delivery companies are making it just as easy for shoppers to buy something on the other side of the world.

Blogger Shannyn Allan recently saw a $70-plus faux stone necklace in a boutique near her home in Chicago. She snapped a photo, ran it through Google Image and found a website where she could get the same one for $16 with approximately $7 added for shipping. It arrived on her doorstep about three weeks later—three weeks, because it was coming from China.”

Guess which product and retailer won’t be collecting tax – The Chinese seller.  

What sales tax scheme actually would enforce the tax?  States enforcing their already existing use tax laws on the books.  Spend some money that would be paying the CSPs and educate your own state residents, audit and enforce existing laws.

Myth of Declining Sales/Use Tax Revenue – Wisconsin Edition

Had a lovely talk with a Wisconsin employee and Streamlined States Governing Board executive.  I enjoyed our talk regarding our views on the MFA and even worse RTPA, but he did bring up a couple of chestnuts that I’ve covered before in the blog, such as the myth of declining revenue.  So in honor of our chat, here’s the Wisconsin edition.   All data is from the Wisconsin Department of Revenue.  Full year data is for retail trade (retail sales).

2010: $1,855,219,269

2011: $1,904,651,681  2.7% increase

2012: $1,966,171,658  3.2% increase

2013: $2,062,166,196  4.9% increase

2014: $2,164,206,817  4.9% increase

Hardly declining.  States make it sound like sales tax collection is plummeting due to the rise of online retail.

And the outlook for this year?

https://www.revenue.wi.gov/news/2015/20150430_01.pdf

General sales and use tax collection is up 5.7% over the same period last year.

The Remote Transaction Parity Act Won’t Touch These Foreign Sellers

The Remote Transactions Parity Act (RTPA) and the Marketplace Fairness Act have a gaping hole that will continue to taken of advantage of even if either bill passes.  Combine this with subsidized inexpensive shipping for the “developing country” of China – means that China will continue to ship direct to the US at prices no one else can touch.

Here’s an actual example of what I mean: A $1.39 stereo jack cable for plugging my Ipod into a small speaker.  This item was purchased on Amazon from a third party seller that ships direct from China.  $1.39 and with FREE SHIPPING.  There’s also no sales tax charged since they are a foreign seller.  And as extra frosting, they declare the item was a gift, not a commercial shipment.

china-1w china-2w

The massive big box retailer funded RTPA/MFA push will foist compliance burdens on millions of small remote and marketplace sellers yet leave foreign sellers completely untouched.  Despicably, Wal-mart (and others) funded lobbying organization Stand with Main Street and the related lobbying fronts actually have the nerve to suggest that Alibaba will crush us if we don’t pass the MFA or RTPA.  In fact, any of the foreign sellers through Alibaba will be out of the reach of the law anyway and will NOT collect tax.

 

Cyber Security & the Marketplace Fairness Act/Remote Transaction Parity Act

 

Recent breaches in the last year have shown the perilous state of information security.  Frankly, the bad guys are winning.  A few recent breaches of note:

  • Target
  • Home Depot
  • Anthem Blue Cross
  • U.S. Office of Personnel Management

A quote from the Washington Post on the recent US OPM breach that contained very sensitive information regarding their top secret clearance applications:

“In those files are huge treasure troves of personal data, including “applicants’ financial histories and investment records, children’s and relatives’ names, foreign trips taken and contacts with foreign nationals, past residences, and names of neighbors and close friends such as college roommates and co-workers. Employees log in using their Social Security numbers.”

China is suspected as the culprit in this and other breaches.  These breaches target both civilian and military companies and commercial data is highly prized in these targets.  The skill level of these “advanced persistent threats” or APTs is high.  The attacks are stealthy and frequently successful.

You know who else will have a big, fat bulls-eye on their back?  Certified Solutions Providers.

Why might China or hackers target a CSP?  Because they will be a large collection point for sales data across the entire US economy.  The more data in one place, the more rewarding the target is.

Taxcloud estimate in their promotional video that their market is 3.5 million retailers.  It might be more, especially as the states reduce the small business exemption level over time (their goal is zero exemption, long-term).

Right now there are 6 CSPs and I know that Taxometry is in the works.  That’s a pretty small number of providers to store data.  So what data will the CSPs be storing for the states?

  • Order-level transaction data
  • Item level transaction data (the tax category or TIC for each item purchased)
  • Item level description – a description of what was purchased and/or the part # of what was ordered
  • What exact address did these items ship to (because zip code alone isn’t enough)
  • Retailer information for the sale, such as the shipping address
  • Since there is a 3 year statute of limitations under the Remote Transaction Parity Act, at least 3 years, but likely more, of all transaction data for every single item ordered would need to be stored by CSPs.

I’m not suggesting credit card data would be stored by the CSPs, it won’t be.  But if a bad guy or nation state is looking for a lot of commercial data, it’s easier to target one or more CSPs than individual retailers one by one.  Reverse lookups from address to name are trivial and available.  Recent headlines have shown that the bad guys out there are winning the fight and a skilled group or nation state would probably view this small number of companies an interesting target.

Update: Amusing that the L.A. Times just had an article this morning (6/17/2015) with Rep. Chaffetz complaining about the poor security while his bill actually helps sow the seeds of a future possible issue.  From the Times:

“Intelligence officials are concerned that Chinese intelligence services or others could use the sensitive information, which can include medical histories and other personal details, to blackmail or otherwise recruit spies in the U.S. government and to design carefully tailored emails to infect computers of federal workers with access to secret files.

Chinese officials deny being behind the incursion.

During a contentious congressional hearing about the massive digital theft of personnel files, lawmakers ripped into the officials in charge of securing the networks.

“You failed. You failed utterly and totally,” Rep. Jason Chaffetz (R-Utah), chairman of the House Oversight and Government Reform Committee, told the officials.””