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Why Record ‘Cyber Monday’ Sales Are Bad For State Budgets

By Pat Garofalo on November 29, 2011 at 12:50 pm

"Why Record ‘Cyber Monday’ Sales Are Bad For State Budgets"

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Online sales yesterday hit a new record for “Cyber Monday,” the Monday following Thanksgiving when online retailers have, in recent years, been boosting their efforts to take a larger chunk of the post-Thanksgiving shopping binge. According to data from Coremetrics, online sales yesterday were up 33 percent over 2010, and more than $1 billion in merchandise was sold. The average online order value was $198.26.

While this may be good news for retailers, it’s bad news for state budgets. As Matthew Gardner of the Institute on Taxation and Economic Policy noted yesterday, many online retailers are able to use a tax loophole to avoid collecting sales taxes, depriving states of badly needed revenue:

The National Retail Federation predicts this holiday season, 36 percent of all purchases will be made online. But too many of these purchases will be tax-free, due to an unfortunate loophole allowing e-retailers to shirk their role in helping states collect sales taxes — which cost states $10 billion last year alone, according to researchers at the University of Tennessee.

More tax-free sales mean fewer tax dollars for states — not to mention the consumer dollars that won’t circulate in our local economies because the current system rewards online shopping with out-of-state businesses.

The Supreme Court has ruled that retailers only have to collect sales tax in states where they have a physical presence. That ruling was handed down in 1992, before the rise of e-retailers, yet has allowed companies like Amazon.com to undercut competitors by not collecting sales tax. When lawmakers attempt, as many have, to close this loophole and force Amazon to collect sales tax, Amazon has threatened to simply leave those states.

According to the latest Fiscal Survey of States by the National Governors Association and the National Association of State Budget Officers, state budgets have improved slightly since the beginning of the Great Recession, but states “still face a dire fiscal situation.” The revenue generated from online sales could certainly help, but a pernicious tax loophole with no public policy purpose is depriving states of those dollars, forcing them to cut ever deeper into programs upon which people depend.

Update

Earlier, this post incorrectly identified the data firm Coremetrics as Corelogic.

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