Sales tax on Internet buys could help fill California budget gap

SACRAMENTO -- Though it may seem like chump change compared to California's projected $35 billion budget deficit, sales taxes on online shopping could spare countless small government programs from extinction by raising $200 million yearly -- and possibly much more.

This newest potential budget fix resonates far beyond California. Nationally, analysts believe local and state governments could add hundreds of millions -- if not billions -- of dollars to their treasuries as shoppers increasingly buy online.

"We can no longer ignore an entire segment of the retail marketplace," said Pat Leary, lobbyist for the California State Association of Counties and a frequent online shopper herself. "This is no longer a fad. This is a genuine legitimate part of peoples' retail behavior now."

Even as retail sales are sluggish, Internet shopping is expected to climb to $40 billion this year over last year's $30 billion, according to New York-based Jupiter Research. It could reach $105 billion within five years, senior Jupiter analyst Ken Cassar said.

Still, many online shopping deals are closed without sales tax -- $10 billion for computers and accessories, $4.7 billion for clothes and $2.8 billion for books wasn't taxed, according to Jupiter.

The reasons are complex and have defied solutions.

Many online retailers balk at having to compute the hodgepodge of local sales taxes across the nation. Most customers, in turn, duck their duty to pay the sales tax themselves and most states don't go after them.

But the issue is taking on fresh urgency in state capitals, where last fiscal year governors collectively sliced $13 billion and are preparing to whack billions more, according to the National Governors Association.

At the height of Silicon Valley's technology explosion two years ago, Gov. Gray Davis vetoed a bill that would have forced California's online retailers to charge state residents an online sales tax. Davis, then presiding over a budget awash in surplus funds, said the bill would send the wrong message to an emerging new marketing medium and robust job generator.

Now, facing a record budget shortfall, Internet sales taxes are among many options on his table.

"We'll be looking at all ideas," said Davis spokeswoman Hilary McLean.

That might encourage some tax reform advocates.

"There are a lot of programs that cost $10 million that I care about," said Lenny Goldberg, a budget lobbyist and head of the California Tax Reform Association.

Estimates vary widely on how much local and state governments are losing while they devise plans to encourage online retailers to collect sales taxes voluntarily.

One widely quoted study by the University of Tennessee maintains that states, cities and counties nationwide lost $13.2 billion in revenue last year from uncollected "e-commerce" sales taxes.

A 2001 study for the Utah-based Institute for State Studies predicted annual losses up to $45 billion by 2006. By that analysis, California last year lost $1.75 billion in revenues, while Texas and New York followed with about $1 billion each.

Those figures dwarf the estimate of the California Board of Equalization, which suggested annual losses were $147 million. In 2000, the state's Legislative Analyst pegged yearly losses at $80 million to $200 million.

Sales taxes account for more than 30 percent of California's income. This year the state expects its 7.75 percent tax on sales will generate $22.3 billion. At least 18 of California's 58 counties add another half cent for highways and transit.

Fearing losses up to 10 percent of their annual sales tax revenue, numerous other states are trying to make it easier for companies to compute online sales taxes for them.

Utah Tax Commissioner R. Bruce Johnson hopes within a year at least 10 states will create a simple, single statewide sales tax rate. He has tried to enlist Wyoming, North Dakota, Ohio, Michigan, Florida and North Carolina in his campaign.

Meanwhile, states such as California are feeling pressure to get more aggressive. One coalition of police and fire departments and local chambers of commerce has suggested the state should first collect more sales taxes before raiding city hall treasuries.

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On the Net:

University of Tennessee study: www.statestudies.org

California Commission on Tax Policy in the New Economy: www.caneweconomy.ca.gov

Survey of state efforts to simplify sales tax structures: www.geocities.com/streamlined2000.