Loss of sales and use taxes from online purchases will cost the state of Alabama more than $1 billion during the next five years unless laws are enacted to prevent it, according to a University of Alabama at Birmingham analysis released Feb. 21, 2012.
“We are in the midst of a revolution in the way businesses operate, but few are considering the implications at the city, county and state levels,” said Robert Robicheaux, Ph.D., chair of the Department of Marketing, Industrial Distribution and Economics in the UAB Collat School of Business and lead study author. “We found that laws governing online shopping cost the state, counties and municipalities about $200 million in sales- and use-tax revenue annually and the loss of 3,500 to 4,000 jobs annually.”
In 1992 the U.S. Supreme Court ruled that retailers who have no physical presence in a state, such as a store, warehouse or office, cannot be required to collect and remit applicable sales tax. The court, however, did not exempt buyers from the obligation to pay sales tax to their state for each online purchase.
“Many consumers don’t remit sales taxes on Internet purchases simply because they don’t know they are supposed to pay them,” says Robicheaux. “There is an urban myth that if you buy something on the Internet then you don’t have to pay taxes. That is false, and it hurts everyone in Alabama.”
Retail sales revenues create jobs, and the loss of more than $2 billion dollars in taxable sales revenue annually can prevent job creation that generates $1.25 billion to $1.5 billion in household income, according to Robicheaux. The lost income and sales can continue or increase family dependence on the state for support, he said.
“The economic multiplier effects are significant. In addition to individuals, it affects retailers, bankers, commercial property realtors, developers, advertisers and more,” said Robicheaux, who also is a director for the Alabama Retail Association. “When we buy products from California, Colorado, Texas or Florida, we ship money straight to those states; if their businesses don’t have a nexus in Alabama, they give us zero dollars in return.”
According to the U.S. Census Bureau, almost 5 percent of all retail sales, in dollar volume, are online. Robicheaux, using a regression model, projects that number to grow about 7 percent each year. By the end of the decade as many as one in 10 retail purchases will be made on the Internet.
Robicheaux says Alabama is lagging in online sales revenues and retailers need to offer merchandise and competitive prices online to slow the rate of sales revenue leaving the state. He also supports national proposals that would eliminate the loophole that benefits out-of-state merchants.
“Even though we are reporting the loss of $200 million annually in direct sales and use tax, we are only scratching the surface of the total impact to Alabama,” Robicheaux said. “The tax revenues we are losing are diminishing the capacities of our state, counties and municipalities to provide essential services.”
Robicheaux used two methods to estimate future online retail sales growth through 2016. The first approach, based upon forecast gross domestic product growth, predicts between 2.2 percent and 2.5 percent growth each year. The second approach projects annual growth between 6 percent and 7.5 percent each year using a regression model.