Internet Sales Tax? Get Real, Public Sector

At the core of sound strategic sourcing lies spend analytics. Inevitably, you need to analyze the potential contribution impact among the many activities you could undertake. Time is always limited, and there is little point in focusing scarce resources on something that will not move the dial appreciably (especially not if there are juicier targets ready elsewhere).

With that in mind, let’s look at the current revenue raising initiative by parts of Congress (and the Obama Administration) to impose sales tax on all internet sales. This is a radical change that will undoubtedly affect both the business model and the cost baseline for many retailers. After reading this story, I couldn’t help but wonder how much money this could actually generate for the states. The emotions have been clearly presented, but what are the facts?

In the story, the Department of Commerce says that $226 billion in online sales were conducted in the US in 2012. Let's say unreported state sales taxes average out at around 6.6% - since some sales taxes are already collected by retailers with in-state (aka "nexus") presence, and of course not all states even have a sales tax, which gives us a nice round $15 billion figure in "lost" sales taxes that could be reaped from this new legislation.

With 316 million people living in the US, that's a total of $47 per person. Assuming some level of market contraction of sales with the additional taxes (since this is always the result, if not even the purpose, of taxes), the outcome would be even less, perhaps $40 per person in the country, or $160 per year per family of four. Contrast this with the federal deficit, which is currently at $53,350 per capita – or over $213,000 for the same family of four – and this becomes a painfully empty exercise.

Those of us who remember the gnashing of media teeth and general lamenting and keening over President Reagan and the “Reaganomics” years at the tail end of the Cold War might not be surprised, but to all others, take a look at this graph:

federal debt

Wouldn't it be nice if media could make some noise over our current indebtedness - which is close to twice what it was under Reagan?  For those interested, you can build your own view of the official OMB data here.

Note how our debt load just goes up, up, and away. We’re not making any payments of substance – we’ll have to elect Superman to rein in this free-spending Congress. Not only that, but we don’t have the invigorating GDP growth of the Reagan-era tax cuts and pro-business culture either. Short of cherry-picking Q4, 2008 as your starting point, our GDP growth, what little there is, is trending steadily downward, as the following chart shows.

GDP Growth Rate

Raising taxes will not make us more competitive in the global marketplace. I wouldn’t be surprised if this won’t lead to more direct shipments from overseas? A 7% or so sales tax wedge added to domestic sales will only help offset the shipping expense from overseas. Rinse and repeat.

Call me a cynic, but I also view this is a “foot in the door” approach by Congress – if you can tax it, you can control it – and when the numbers don't materialize, let’s expand the taxable base. Were this to come true, at least all firms with ecommerce solutions, tax auditing software, etc. will see a boost – even if the overall activity is counterproductive. As always, government knows best in how to complicate lives and businesses.

No wonder the approval rating for Congress hovers around 13%.

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First Voice

  1. Tony Montana:

    All this legislative effort over $40 per person – while printing money like Scarface snorts coke.

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