Tax collections not keeping pace with online sales

A rosy outlook for holiday online sales won't do much to improve the bottom line for struggling state and local governments because of lagging tax collections.

While overall retail sales are expected to increase a humble 2.5 percent, online sales are forecast to rise by a jolly 14 percent, according to the International Council of Shopping Centers.

Like Main Street and mall retailers, online retailers provide goods in exchange for dollars, but when it comes to taxation, online retailers are often treated differently.

E-tailers, as they are called, generally aren't required to collect state sales tax from orders shipped to states in which they have no physical facilities, under a 1992 Supreme Court decision. They do collect state tax in the states where they're physically located.

Walmart, Target and other large discounters that have brick-and-mortar stores nationwide are required to charge state sales tax on online orders, as they would at their stores in those states.

Individual consumers in Iowa are expected to track their online purchases and pay a consumer's use tax on non-taxed transactions to the Iowa Department of Revenue.

The state revenue department, however, has no way of collecting taxes that buyers fail to report. Iowa officials don't even know how much tax goes uncollected from online sales, revenue spokesman Roger Stirler said.

Other states that have studied the issue see big bucks slipping through their tax collection net. A 2009 study by three University of Tennessee professors indicated online sales taxes could help states generate at least $52 billion in revenue over the next six-year period.

Iowa's major effort for improving tax collections from online sales is membership in Streamlined Sales Tax, a voluntary organization of states trying to make tax compliance simpler for e-tailers and other companies that sell items throughout the nation.

Iowa collected $12.3 million in sales tax through the system in fiscal 2010 - much less than projected a few years earlier when the state announced its participation.

Iowa State University economist Dave Swenson admits he's one of the many Iowans who've neglected to pay consumer's use tax on the items he buys online each year, mainly because of the difficulty with keeping track of the purchases and the taxes owed and with paying it.

Swenson said he's long advocated creation of a uniform sales tax rate - say 5 percent - for all online transactions across state borders. It would cut through the complexity for online sellers dealing with so many taxing jurisdictions, Swenson said, and ensure that state and local governments at least get a piece of tax revenue for online sales.

Stacie Sefton, president of B&H Factory Outlet in Cedar Rapids, would certainly go for that.

Sefton is the largest apparel retailer on eBay. Her company, which employees about 80, also launched two online stores - BHFO.com and BHFObooks.com - in February. She and other top eBay sellers lobbied the state Legislature this fall against an online sales-tax collections bill that she said is not small-business-friendly.

“We are not opposed to a flat tax,” Sefton said, “although it would hurt some e-tailers, like small companies that go up against Walmart in things like electronics and DVD sales.”

If the 14 percent online sales gain is achieved, it would be good news for some Corridor businesses. Online sellers like B&H and Nordstrom Direct in Cedar Rapids employ hundreds of seasonal workers during the holiday season.