Potential additional state revenues from taxes on mail order sales could total $3.30 billion in 1994.
Editor's note: This article is reprinted, with permission, from a May 1994 publication of the U.S. Advisory Commission on Intergovernmental Relations (ACIR).
Consumers who purchase goods from out-of-state mail order firms owe a use tax on taxable purchases equivalent to the sales tax they would have paid on purchases from an in-state firm. Although most states have had use taxes as long as they have had sales taxes, the use tax is quite difficult to collect unless the out-of-state seller has some nexus or physical link to the state. Only if such a link exists can states require collection of the tax, according to the U.S. Supreme Court opinion in National Bellas Hess v. Illinois Department of Revenue (1967). However, in Quill Corporation, Inc. v. North Dakota (1992), the Court ruled that the Congress could overturn the nexus provision and authorize the states to require payment.
States have been seeking relief from the nexus requirement because of 1) the effects on noncollection of state revenues and 2) adverse competitive effects on in-state retailers. This report provides estimates for 1994 of the potential revenue from collecting state and local sales or use taxes on interstate mail order sales that are presently untaxed. The estimates are based on the $3 million de minimis and the local sales tax provisions of legislation pending in the Congress (S.1825).
The methodology for producing the estimates was developed by ACIR in 1986 and published in State and Local Taxation of Out-of-State Mail Order Sales. The last estimates were published by ACIR in State Taxation of Interstate Mail Order Sales: Estimates of Revenue Potential 1990-1992.
In a recent study on behalf of Direct Mail Marketing Association, Robert Nathan and Associates used a similar methodology, but produced lower estimates than those in this report. [Editor's note: The basic differences between the ACIR methodology and that of the Nathan Associates are discussed in Appendix 2--which is not reprinted with this article--of ACIR's 1994 Revenue Estimates report.]
Overview of Methodology
A base was developed of total 1992 mail order sales (the most recent available figures) that are potentially taxable. This figure was then adjusted for the de minimis requirement in S.1825. Exempting firms with national sales of less than $3 million reduces collection and compliance costs considerably, with only a modest impact on the base and potential revenue.
This adjustment was made by multiplying the base by a percentage rather than by subtraction to avoid duplicating subtractions at later stages. The resulting base, $80.34 billion, was apportioned among the 50 states and the District of Columbia in proportion to personal income. The resulting figure is the mail order sales base.
For each state, we calculated a tax rate that reflects the state provisions for local sales and use taxes. The local tax adjustment was made by applying the ratio of local to state sales tax collections to the state sales tax rate. The combined state-local rate was then reduced by the proportion of mail order purchases in each state that consists of items not subject to the sales and use tax. This calculated rate, which is used to reflect relative state exemptions, is not the rate that would actually be imposed if S.1825 is approved. The product of the exemption-adjusted state-local tax rate and the state's mail order sales base represents total potential revenue from interstate mail order sales for each state.
To determine additional revenue, it was necessary to adjust the total base for in-state sales collections and for base with existing nexus or voluntary compliance on interstate sales. The resulting nexus-adjusted 1994 state mail order sales base is $58 billion. The exemption-adjusted rate for each state was applied to this base to determine the potential additional revenue--$3. …