Over in Washington, D.C., Congress is surfing Amazon.com (NASDAQ:AMZN) for Christmas gifts, and getting ready to leave town for the holidays. But around the country, state and local legislators, and their allies in the brick-and-mortar retail industry, hope Santa will deliver one last gift before Congress departs: an Internet tax bill.
Tired of getting coal for Christmas
Legislators are upset that years of lobbying have failed to convince many online e-tailers to collect sales taxes from customers in states where they lack a "physical presence." In states such as Indiana, for example, sales taxes can account for as much as 40% of tax revenue. So, as legislators see it, every dollar shoppers save on taxes through Internet purchases is a dollar lost to public colleges, hospitals, schools, and police.
Local retailers are just as mad, albeit for different reasons. They want online competitors to play fair, and not undercut their prices by ignoring sales taxes -- which local retailers must collect.
Online retailers say it would be impractical to collect sales taxes, with eBay (NASDAQ:EBAY) in the forefront of the opposition. But the ICSC, the trade group for local brick-and-mortar shops, argues that "sales tax fairness is critical in leveling the playing field for brick-and-mortar retailers, while restoring the states' right to establish and enforce collection of their own sales taxes."
Chances are, neither the local legislators nor the retailers are going to be very happy this Christmas.
Gridlock in the stocking
The U.S. Senate in 2013 actually passed an Internet tax bill that would require e-tailers to collect sales tax on out-of-state sales, and hope remains that the House of Representatives might vote on a similar bill this year. House Speaker John Boehner, however, said he has no plans to bring a bill to vote before Congress leaves town.
But what if he did? What if Congress did pass an Internet tax bill? Would it really be as big a deal as its supporters think?
Crunching the numbers on an Internet tax bill
It just might. As luck would have it, the state of Indiana struck a deal to have Amazon begin collecting sales taxes on Jan. 1, 2014.
How much money did this make for the state?
Funny you should ask. According to the Indiana Department of Revenue Annual Report 2014, the state collected $7 billion in "sales and use" taxes in fiscal 2014, which ended on July 1, 2014. That was up 3% from the previous year, versus only a 1% increase in overall tax collection in the state -- a $200 million cash infusion.
Mind you, sales tax growth doesn't always track overall tax collection. In fiscal 2013, for example, Indiana's sales tax receipts grew 2% year over year, lower than the 3% growth in overall tax receipts. The opposite trend was seen In fiscal 2012: 6% sales tax growth, 5% total tax increase.
But still, the sharp divergence in growth rates -- sales tax receipts growing three times as fast as overall taxes -- happened in only six months' time. Over a full year, that gap could widen. (That's even more likely, given that these six months didn't include the Christmas shopping season.) And if Congress passes an Internet tax bill extending to all online e-tailers, and not just Amazon as Indiana did, you can imagine how state coffers would overflow -- In Indiana and across the country.
Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and eBay. The Motley Fool owns shares of Amazon.com and eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.