Online taxes could raise revenues for state

In the wake of a $3.5 billion budget shortfall, the state government is looking for ways to boost revenue — and online sales taxes could be one way to do it.

The state has lost nearly $162 million in taxes from e-commerce sales this year, according to a University of Tennessee study. Like many other states, North Carolina is hoping to rectify that loss through legislation or through the courts.

Many online companies do not pay state and local sales taxes because law requires a corporation to have physical presence in a state in order to be taxed. Companies like Amazon, which don’t have offices located in the state, don’t pay sales taxes.

“Our current structure is driven by the economy of 50 or 60 years ago,” said Scott Daugherty, N.C. commissioner for small business.

The revenue lost in e-commerce sales and use taxes this year is an estimated $8.6 billion nationally, according to the study.

Online retail sales are expected to rise from $3 trillion this year to $4 trillion in 2012.

By that time, the study projects national lost sales tax revenue to reach $11.4 billion.

“I think the problem is very significant in terms of dollars, especially now, when just about every state is experiencing a huge budget shortfall,” said Donald Bruce, co-author of the study and associate professor of economics at the University of Tennessee.

A bill in the U.S. Congress, the Main Street Fairness Act, proposes a solution to the debate. It would determine if a firm has enough sales activity in a state to qualify to be taxed, Bruce said.

This comes at a time when N.C. sales tax revenues already show double-digit growth rates, according to a report by the Rockefeller Institute.

The N.C. Department of Revenue claims the budget shortfall did not spur the concern for online sales taxes, said Beth Stevenson, spokeswoman for the department.

“This isn’t anything new,” she said. “This is an issue of fairness and equity to small businesses.”

Because internet companies are exempt from sales taxes, small and local businesses that do pay them are at a competitive disadvantage.

“If it’s not directly damaging small businesses, it’s clearly limiting their opportunity for growth,” Daugherty said.

Kenneth Lay, former Revenue Secretary, kick-started the effort to collect from internet companies.

Negotiations with online retailers resulted in the Internet Transactions Resolution Program, which Lay announced in April of this year.

Under the program, companies that agree to collect sales taxes for the state will not be liable for any taxes or penalties in the past.

After Lay requested information for collecting taxes from online retail giant Amazon, the company sued, claiming the state sought private information about customers.

The judge ruled in favor of Amazon on Oct. 25 but stipulated that the company was not exempt from valid auditing.

“The declaratory relief issued here … cannot be interpreted to grant Amazon a free pass complying with any valid tax law of North Carolina or elsewhere,” said Marsha Pechman, U.S. district judge, in her decision.

Stevenson said the department has appealed the case.

“We will continue to pursue that in order to pursue the fair and equitable taxation of businesses,” she said.

Contact the State & National Editor at state@dailytarheel.com.