Most Hoosiers are well into their holiday gift lists, and the economic boost that comes with all this shopping lifts retailers’ spirits.
State coffers are filling up, too, with sales tax revenue—good news for a state that relies so heavily on this tax to pay for its operations. Last year, the state collected $6.2 billion in sales tax, easily surpassing the second-largest revenue source, the $4.6 billion collected in personal income tax.
Why, then, are some legislators and local retailers a little blue? Because they’re missing out on $77 million in sales tax revenue from online transactions, according to a recent report by the Indiana Fiscal Policy Institute. While that might not seem like much money when the total is more than $6 billion, it’s a sore spot in the public policy debate.
It’s a debate that’s likely to occupy a fair amount of time in the General Assembly next month. A key legislator, Sen. Luke Kenley, R-Noblesville, is a prominent player in the effort to convince Congress it should weigh in.
Some of the biggest names in retail also are in the fray—Simon Property Group and Amazon among them.
The question: tax equity.
Wait! Don’t nod off. This affects you, me and all Hoosiers. Let me explain.
Nearly 20 years ago, the U.S. Supreme Court determined that online retailers didn’t have to collect and remit state sales taxes if they didn’t have a physical presence in that state. Now, this was a big deal for companies that did catalog sales, but it was a defining moment for nascent virtual retailers like Amazon and eBay.
Thanks to the court’s ruling, these virtual retailers had a built-in price advantage over local merchants. As broadband Internet connections proliferated in the late 1990s, the implication of this price difference became apparent.
E-commerce leaped from less than 1 percent of all retail sales in the fourth quarter of 1999 to more than 5 percent of all sales in the fourth quarter of 2010. That means online retailers captured more than $50 billion in sales in the fourth quarter a year ago.
Amazon did $34 billion in sales last year.
That iPod purchased through Amazon.com cost 7 percent less than the one sold at Apple’s store at Keystone at the Crossing. Amazon didn’t have to collect Indiana’s sales tax; Apple did.
Now Hoosiers who bought those iPods and all the other goodies online are on the hook for the sales tax. Indiana law requires us to declare our online purchases on our income-tax forms and pay the sales tax then.
A lot of Hoosiers, however, are scofflaws. Less than 1 percent of the state’s income-tax forms include such declarations, which produces just $3 million in sales tax collections.
The upshot: Indiana doesn’t collect $77 million a year in sales taxes owed from online transactions while local retailers lose millions of dollars to online retailers with a built-in price advantage.
That’s why Simon sued last month in a bid to require Indiana to enforce its sales tax on all transactions. It’s also why the Indiana Merchants for Tax Fairness, a group of 250 local retailers, formed.
Complicating this drama is the fact that Amazon has four major distribution centers in Indiana that employ hundreds of Hoosiers. Amazon wants no part of collecting sales taxes for Indiana and has threatened to close or move facilities in other states that have attempted to force the issue.
The IFPI study constructed an econometric model to test whether legislation to require online sales tax collections would affect site location decisions for online retailers. The tests found no connection between enactment of the so-called Amazon Tax and the company’s site decisions.
None of this ensures that state legislators or members of Congress will be able to find a solution that makes sales tax collections equitable, which is an important tenet in economic theory.
It does give them a factual basis from which to work.•
Ketzenberger is president of the Indiana Fiscal Policy Institute, a not-for-profit dedicated to non-partisan research into the state’s tax policies and budget practices. Send comments on this column to firstname.lastname@example.org.