Internet sales

Date posted: September 26, 2012

For a while there’s been an issue involving taxes applied to internet sales. Why is this issue important to states? N.C. State University economist Mike Walden responds.

“Well, it’s important because states are losing sales tax revenue when people don’t go to what we call brick-and-mortar stores in their state and buy something and that’s taxed. So, when they go on the internet, that’s not necessarily going to be taxed. In fact, in most cases it’s not.

“Now in North Carolina, taxpayers are supposed to report to the state when they do their income taxes how much they’ve spent on the internet — on interstate commerce and internet commerce, I should say — and pay taxes on that. Of course, that’s based on people complying with that.

“So this is a problem, because … most states, like North Carolina, derive a substantial amount of their revenue from sales taxes, and here states are losing revenue due to internet commerce.

“One option, of course, for states is to say, well, if we don’t have as much sales tax revenue as we need, we’re just going to up the sales tax rate. That is, for those sales that do occur in brick-and-mortar stores, we’re simply going to increase the rate.

“Now some research shows that that could backfire, because what this research shows is that, to the extent that the sales tax goes up in a state, that drives more people to the internet to buy. So it really doesn’t help the states.

“And really what will have to happen is … — and it’s likely going to be at the federal level — some sort of resolution as to how internet commerce is going to be handled in terms of state taxes. Until we get that, we’re not going to have this issue solved.”

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