Regressive Retail: Online Shopping and the Sales Tax

In many states consumers do not pay sales tax for online purchases, unlike their traditional brick-and-mortar counterparts. Legislators and retailers around the country are raising significant questions about the fairness and fiscal sensibility of this practice. In Congress, Rep. Steve Womack (R-Arkansas) introduced the Marketplace Fairness Act in 2013, which would make it easier for state governments to collect sales revenue from online sellers.

Policymakers often argue that this exemption costs state governments too much revenue and gives online sellers an unfair competitive advantage over physical retailers. But perhaps even more pernicious is the way the tax exemption makes the already-regressive sales tax even more unfair for low-income residents.

Online shoppers who use sites like Amazon tend to be wealthier than those who buy exclusively in stores. According to Business Insider, 55 percent of online shoppers make over $75,000 per year. Since the median income in the United States is only about $50,000, it is evident that online shoppers — who benefit from this sales tax exemption — come from richer demographics. One big reason for this phenomenon is that internet access itself varies significantly between income groups. While 97 percent of Americans making at least $75,000 per year have internet access, only 74 percent of those earning under $30,000 yearly have internet access. Thus, there exists a 24-point internet access gap that restricts lower-income Americans from shopping online and therefore benefiting from this loophole in the tax code.

Furthermore, the sales tax itself is already known to be one of the most regressive; it disproportionately affects lower-income citizens, since they spend larger percentage of their income on essential consumables like food and clothing. CityLab reports that Americans earning in the bottom 20 percent income bracket pay a significantly higher percent of their incomes — roughly 7 percent — on sales and excise taxes, while the top 1 percent income bracket pays less than one percent. This disparity is doubtlessly enabled to some extent by the tax-free nature of online purchases, to which the wealthy have greater access.

It is worth noting that retail workers — who are already subject to substandard wages — are adversely impacted under this system. The tax exemption gives online sellers an unfair advantage over brick-and-mortar retailers. According to the Bureau of Labor Statistics, the median retail salesperson only makes $10.47 an hour. And considering that 15 percent of retail workers live in poverty, this can be considered an indirect tax on these people; if a business folds because of online competition, the latter’s sales tax exemption is a partial culprit for the ensuing job losses.

Without taxes on online purchases, states lose revenue that supports social services for the less fortunate. As the Census Bureau has shown, over the past decade e-commerce has accounted for a steadily increasing amount of total retail sales. In the last quarter of 2015, over 7 percent of total retail sales were online, up from under 3 percent in the first quarter of 2006. Thus, an increasing amount of sales are untaxed, causing frequently cash-strapped state and local governments to forgo revenue. For example, the National Conference of State Legislatures reports that in 2012, states lost a cumulative $23.3 billion due to the internet sales tax exemption.

This money could be spent in a number of areas where states currently shortchange their lower-income communities. For example, low income school districts across the country are significantly underfunded, receiving an inequitable share of state tax revenues. Pension plans given to workers in many states are underfunded, possibly requiring new revenues to stay solvent.

One of the largest arguments against imposing an internet sales tax is that it would cause an undo administrative burden on sellers, especially small businesses. This claim is dubious to begin with, given that many popular online sellers — such as Walmart and Barnes & Noble — have physical presences in practically every state as well, and therefore pay sales taxes. It is unfair and arbitrary to give companies like Amazon an advantage over these companies, simply because Amazon does not have physical locations in most states.

When it comes to small businesses, it is important to note that internet sales tax opponents have a partly valid point. Purchasing and operating tax collection software could prove a burden for smaller businesses. Luckily, policymakers have come up a way to get around this problem: The Marketplace Fairness Act would require that states pay for any additional tax collection software needed. This solution could also be implemented when individual states decide to enforce internet sales taxes. Furthermore, the Act only goes into effect after states have simplified their tax codes, making it easier for companies to navigate complex sales tax laws and further reducing this administrative burden.

If the internet sales tax can be made without harnessing businesses with additional costs, measures introducing internet sales taxes have the potential to be extremely beneficial, perhaps ending the unfairness to lower-income consumers inherent in the current system. Moreover, it is important that policymakers take quick, decisive action. As e-commerce makes up a larger and larger portion of total sales, state revenue losses from this exemption will continue to increase.

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