Last week the Board of Equalization released its updated e-commerce revenue estimate.  The Legislature and others have long cast their attention on e-commerce revenues.  It is true there are many taxable transactions from which tax is not being collected from either the Sales tax, which must be collected by companies that have California nexus, or Use tax from individuals and businesses who order something from the Internet and use or consume purchases in California. 

The report states, “We now estimate annual revenue losses of $1.085 billion in calendar year 2009 (to be remitted in fiscal year 2009-10). Of the total, $600 million are owed by consumers and $485 million were unpaid by businesses. These revenues are spread among approximately 12.7 million households and 2.9 million businesses.”

This may seem like a big number, but look more closely at the math.  “Unpaid sales and use tax liabilities in 2009-10 average $166 per year for each California business, and $47 per year for each California household.”   To recover these unpaid liabilities, the Board staff would need to go after all these individuals and businesses.  Right now it cannot be done in a free society like ours for less than $166 per business and/or $47 per person. 

The report states, “Without the ability to require the seller to collect the use tax and remit it to the Board, collecting these use tax liabilities from the purchaser can become very difficult and expensive…While some taxpayers may owe large amounts, others will have paid their liability in full or may not have use tax liabilities from remote purchases. Without the expensive process of auditing a large number of these taxpayers, it would be difficult to know how much of this revenue we can expect to receive.”

Under current law it is not worth while for the state to aggressively pursue all of these unpaid liabilities.  It is theoretically possible to do so if we were to set up a police state where the government has the right to look at everybody’s internet use, but that is absurd and unnecessary.

My position is we could make a lot more progress by first setting a minimum threshold, say $10,000 in purchases, under which no tax is owed, and focus our resources on large purchases.  I agree this is not completely fair to small businesses that have to compete with Internet companies.  This is why I advocate the best way to level the playing field is to either eliminate the Sales and Use tax completely, or lower it to the point where the difference is about the same as shipping typical Internet items.  On top of Internet displacement, the state’s retailers are coping with a huge Sales tax increase this year, which is bad for retailers, bad for the tax gap, and bad for the people. 

BoE auditors have success finding Use tax liabilities by looking at things like corporate income tax returns, U.S. Customs information as well as Food and Agriculture data to find evidence of equipment purchases.  However, there is potentially a lot of collectible revenue that could be found through the depreciation schedules for equipment on corporate tax returns.  When somebody buys a million dollar machine there is a significant amount of Use tax owed.  According to BoE staff, the BoE could collect Use tax from a lot more businesses if the Franchise Tax Board had depreciation schedule information in electronic format.  But neither they, nor the Internal Revenue Service, capture this electronically.  That would be a good reform idea to alleviate the tax gap.

My thanks to the hard working staff at the BoE for this report.

http://www.boe.ca.gov/legdiv/pdf/e-commerce-11-09.pdf

Technical notes and more background on methodology: 
http://www.boe.ca.gov/legdiv/pdf/e-commerce-11-09-technical.pdf

This entry was posted on Monday, November 16th, 2009 at 12:00 am and is filed under Blog Posts.