California’s Tax Gap: A Look at eBay

One factor contributing to California’s chronic budget problems is the declining yield of the state’s sales tax. The shift of economic activity from goods to services and the rise of Internet and mail-order sales that escape taxation have reduced the share of each dollar of personal income that is spent on taxable goods. If taxable purchases accounted for the same share of personal income in 2008-09 as they did in 1966-67, the state would have collected an additional $21.5 billion in sales tax revenues – more than enough to close the current budget gap.

A new study published in the June 2010 issue of the scholarly National Tax Journal looks at the contribution of one company – eBay – to states’ tax gaps. The authors examined how many eBay sellers in the category of “Consumer Electronics” collect state sales taxes and the revenues lost to states as a result of eBay sellers’ noncompliance with state sales tax laws.

The authors concluded that, “the seller sales tax compliance rate on eBay…is alarmingly low.” Among consumer electronics sellers, only 18.85 percent complied with state sales tax laws. For California, the authors estimate that eBay sellers’ noncompliance costs the state $14.1 million per quarter or $56.4 million per year based on 2007 sales.

What would an extra $56.4 million mean for the state’s budget? It is enough to restore the Governor’s proposed elimination of vision benefits and higher share of costs for families with children in the Healthy Families Program, limits on adults’ prescription drug coverage in Medi-Cal, and reduction to the reimbursement rate paid to family planning service providers. Alternatively, that $56.4 million could be used to pay for restoration of the Governor’s proposed elimination of the California Food Assistance Program (CFAP) that provides food stamp benefits to legal immigrants, and restore cuts to community clinics and asthma education programs.

It is fashionable to talk about the importance of “modernizing” California’s tax system and we have often said that collecting taxes due on internet sales is a good place to start. Now we have some compelling evidence of the very real cost to the budget from failure to collect what is already owed.

— Jean Ross

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