Internet Sales Costing States Billions, Report Says

State and local governments will lose $13.3 billion this year and tens of billions more in years to come because sales taxes are not paid on most Internet purchases, a report released Tuesday by the Institute for State Studies says.The estimated losses are 41 percent higher than those predicted in an April 2000 study by the same researchers, a non-partisan, non-profit group affiliated with the Western Governors’ online university. The difference between last year and now is largely the result of higher projections of business-to-business sales activity on the Internet

The estimated losses are 41 percent higher than those predicted in an April 2000 study by the same researchers, a non-partisan, non-profit group affiliated with the Western Governors’ online university. The difference between last year and now is largely the result of higher projections of business-to-business sales activity on the Internet.

Projected losses jump to $45.2 billion in 2006 and $54.8 billion in 2011, which is an amount greater than the entire budget of one of the nation’s largest states, Florida.

The losses occur because states are not able to collect taxes on many Internet transactions, even though most of these transactions are taxable under current laws.

Tax collection efforts are hamstrung by a 1992 Supreme Court ruling that won’t allow them to reach beyond state borders to grab tax dollars. Collection efforts are further complicated by the difficulty of sorting through the regulations of over 7,500 different state and local taxing jurisdictions, each with its own tax rates and definitions of taxable goods.

At a press conference introducing the report, Utah Gov. Mike Leavitt said there had been some question as to whether states were losing significant sums from uncollected sales taxes on Internet transactions. This study puts that question to rest, he said.

The loss of these dollars is a major issue for the 45 states that levy sales taxes and count on them for nearly half their revenue. The loss of tens of billions of dollars a year would curtail their ability to fund schools, healthcare and public safety.

The issue is viewed by some as a matter of fairness — retail stores that have no Web presence fear losing business to online vendors who can hawk their wares without having to collect taxes.

“At the heart of this is an equity issue,” Leavitt said. “The system we have currently creates inequities between retailers.”

Critics point out that sales taxes on Internet purchases would further squelch an already struggling industry. They note also that shipping and handling surcharges on Internet purchases give brick-and-mortar businesses plenty of room to compete.

Leavitt said there are four things states can do to address the current sales tax system’s problems:

• Cut state programs and reduce services to account for lost revenue.
• Turn to other taxes, such as income or property taxes, to make up for lost revenue.
• Have the federal government create a national sales tax, which would involve a massive power shift to the federal government.
• Fix the current system through legislative and technical means.

Leavitt questioned whether sales taxes were even viable in the 21st Century, given the degree to which state and even national borders (and consequently taxing jurisdictions) have been made porous by the Internet.

Although states are still a long way from overcoming their tax problems, efforts to fix the current system are underway. In August, the National Governors Association sent to Congress a letter signed by 42 governors asking for the freedom to design a system for the collection of sales taxes on Internet purchases. Also, three dozen states have begun to simplify and streamline their sales tax systems through legislation.

The Internet sales tax study was commissioned by the Institute for State Studies and prepared by University of Tennessee researchers. Forrester Research, Inc. provided the data, which was drawn from an ongoing survey of the purchasing habits of 200,000 households and 13 different business-to-business supply chains.