As states and localities gear up to convince the next U.S. Congress that all retail businesses--Internet and mail order included--should collect sales and use taxes, a recent report puts new numbers on present and projected revenue losses from online sales.
According to a study by the University of Tennessee's Center for Business and Economic Research, online sales soared to $104 billion in 2003, with state and local governments losing an estimated $15.5 billion in revenue because they lack the authority to collect sales taxes on e-commerce purchases. By 2008, that loss is likely to double. The report, which was commissioned by the National Governors Association and National Conference of State Legislatures, projects that four years from now, the diminution in sales tax revenue will range between $21.5 billion and $33.7 billion, with the greatest losses occurring in states that rely most heavily on the sales tax as a revenue source.
The report is an update of two earlier studies and finds important implications arising from the inability to collect. Collecting the tax is difficult with businesses that do not have physical presence in a state, such as Amazon.com, because they do not have sales tax collection responsibility. These businesses, the report finds, have an incentive to locate production and sales activity in ways that make it possible to avoid that responsibility. This imposes overall losses on the economy.
The collection problem also widens the tax-payment gap between haves and have-nots. The sales tax becomes increasingly regressive as haves go online more and more to make purchases, leaving the have-nots to frequent Main Street stores and pay the sales tax.