Study: Internet Sales Tax Loss Expected To Top $13B

State revenue coffers stand to lose more than US$13 billion in uncollected sales taxes on online transactions in 2001, a number that will balloon to more than $45 billion in the next five years, according to a study released Tuesday.

"When other factors causing sales tax revenue to shrink are added in, the projected tax (loss) increases are even higher," said William Fox, a University of Tennessee professor who co-wrote the report and has been tracking the e-commerce sales tax debate for several years.

The study, prepared by the Center for Business and Economic Research at the University of Tennessee using data from Forrester Research, found the amount of losses this year will be 41 percent more than previously expected. The center had pegged 2001 sales tax losses at $9 billion.

Across the Board

The study quantifies the amount of sales tax revenue that states and local governments stand to lose in 2001, 2006 and 2011 as a result of remote Internet-based retailers not being required to collect and remit sales tax.

According to the report, the 2001 tax loss includes both business-to-consumer (B2C) and business-to-business (B2B) sales, which the report says will make up more than 90 percent of the total e-commerce activity this year.

While the losses are significant for many states, California alone will lose $1.75 billion and Texas and New York will both lose at least $1 billion.

By 2011, states will lose $54 billion annually, the study estimates.

Tough Decisions

The lack of required Internet sales tax collection will force states to make tough decisions in the future, the study said.

Texas, for example, will lose $4.8 billion annually to online sales by 2011, or "almost 10 percent of the state's total expected tax collections," said Donald Bruce, the study's other co-author.

That will force the state to either raise its tax rate by more than a 1.5 percent or find ways to cut spending, he added.

Clock Ticking

The new data come as Congress is deciding how long to extend an existing moratorium on certain Internet taxes, which is set to expire on October 21st. Congress is debating how to address the issue of state taxation of Internet-related revenues, including Internet access taxes and sales taxes.

While some lawmakers and the National Governors Association have expressed concern about lost revenue, others say that allowing new taxes to be enforced against Web merchants -- in a complex system where the merchants will have to work with different tax rules in the 50 states and local jurisdictions -- will stifle growth of e-commerce at the wrong time.

Under a U.S. Supreme Court case, a state government can require a merchant to collect sales taxes only where it has a physical presence, such as a store or executive headquarters.

In June, e-commerce industry leaders, including eBay (Nasdaq: EBAY) and Orbitz, joined together with key lawmakers, including Sen Joseph Lieberman (D-Connecticut) to call for a hands-off approach to governing the Web.

Not Just E-Commerce

The study's authors note that some of the lost revenue cannot be directly attributed to e-commerce alone. State-to-state catalog and over-the-phone sales are also contributing to declining tax receipts.

Meanwhile, larger consumer behavioral changes, involving a shift toward more purchasing of services, are also driving down tax collections, the study said.

The authors added, however, that their figures do not include person-to-person sales, such as those on eBay and other auction sites, which can also contribute to tax losses as consumers choose to buy used items rather than new.

The study was commissioned by the Institute for State Studies, a nonprofit group based in Salt Lake City, Utah.