NCPA - National Center for Policy Analysis

Future Marketplace: Free and Fair

July 31, 2012

Forty-five states, home to 97 percent of the American people, have a sales tax. States may impose a sales tax but federal policy creates a loophole for out-of-state sellers. Sales tax often goes uncollected on sales across state lines, and this imperfect collection results in a preference for buying from out-of-state vendors, says Hanns Kuttner of the Hudson Institute.

The implications of tax differences have grown as new technologies have made it easier for distant buyers and sellers to come together. The ways to reach customers across state lines have grown, as new technologies become available. Specifically, the proliferation of e-commerce via the internet has further enabled customers to dodge state sales taxes.

  • The Census Bureau estimated that in the third quarter of 2011, retail e-commerce sales were 4.6 percent of all retail sales.
  • While this figure is small, it is more than triple the share for e-commerce a decade ago, and is expected to grow further as additional industries learn to take advantage of internet sales.
  • Using the most recent estimates from the National Council of State Legislatures, the total amount of sales with sales tax not collected will be $330 billion in 2012.
  • Given that the average state and local sales tax rate in the sales tax states is 7.05 percent under tax rates that applied late in 2011, it is estimated that $23.3 billion worth of sales taxes will not be collected because of this loophole.

Still, a number of factors limit which industries are able to make their goods and services sellable via the internet, ranging from cost feasibility to customers' personal preferences and needs.

  • Product Comparability: If a good readily available in a store and another good in another state are of the same quality, a customer may select the in-state good, despite a sales tax, because immediacy is a particularly important consideration.
  • Cost of Transportation: Out-of-state sellers will almost always be limited in the sale of physical goods by inherent transportation costs.
  • A Lack of Standardization: Many goods are difficult to standardize, causing customers to want to examine them firsthand before purchasing them.
  • Consumer Preference: Regardless of concerns about standardization, many consumers simply prefer the window shopping experience.

Source: Hanns Kuttner, "Future Marketplace: Free and Fair," Hudson Institute, May 2012.

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