NCPA - National Center for Policy Analysis

Complications & Costs Of Taxing Internet Sales

September 15, 1999

The Advisory Commission on Electronic Commerce established by Congress must wrestle with the vast complexity of state and local sales tax rates and bases.

  • According to two new studies by Ernst & Young and the National Tax Association, 46 states impose general sales taxes and 34 states allow local governments to impose them.
  • Altogether, 7,600 jurisdictions across the country impose some form of sales tax.
  • According to Ernst & Young, for small in-state retailers the burden of collecting sales taxes amounts to 7.2 percent of taxes collected.
  • Costs tend to fall as sales rise, but dealing with multiple sales tax systems increases compliance costs -- for a large firm with sales in 15 different states, Ernst & Young estimates the compliance cost at 8.3 percent of taxes collected.

E-commerce potentially increases these costs enormously, because it allows even small retailers to operate in all 46 states with sales taxes.

  • For a large firm operating in every state, the compliance cost rises to 14 percent.
  • For medium retailers the cost reaches 48 percent, and on small retailers the burden is an amazing 87 percent of taxes collected.

In other words, it can cost a small retailer 87 cents to collect $1 of sales taxes.

The Supreme Court has ruled that out-of-state sellers are only obliged to collect sales taxes if they have operations in that state. States get around this by imposing use taxes exactly equal to the sales tax on residents who make out-of-state purchases. In theory, use taxes are imposed on the buyer, not the seller; in practice almost no one pays them.

Advocates of expanding the state's taxing power believe technology can deal with tax complexity. For instance, a new study from the liberal Progressive Policy Institute says free software could solve the problem.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, September 14, 1999.


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