NCPA - National Center for Policy Analysis

Sales Tax Revenues Lost On Internet Shopping

January 26, 1999

All but five states have sales taxes, from which they derive an average of nearly 49 percent of their revenues. In most states and municipalities, a buyer is required to pay sales tax -- but the seller isn't required to collect the tax unless the business has a corporate office, warehouse or other physical presence in the state where the sale occurs.

So people buying products from another state over the Internet are ignoring the taxes and frustrating tax collectors. Then last October, Congress passed the Internet Tax Freedom Act -- placing a three-year ban on new Internet sales taxes.

With Internet sales fast increasing, the amounts in dispute are not small.

  • U.S. sales rung up on the Internet last year totaled nearly $8 billion -- compared to annual sales through catalogs of $48 billion.
  • Last Christmas alone, Internet sales hit $3.2 billion -- tripling the previous year's holiday receipts.
  • In fact, Internet sales are growing faster than catalog sales -- and are due to overtake them in the next few years.
  • Most online sellers don't want the hassle and cost of having to collect taxes and channel them to the country's 30,000 tax jurisdictions.

University of Chicago economist Austan Goolsbee estimates that applying existing sales taxes to Internet commerce would reduce the number of online buyers by 25 percent and reduce spending by more than 30 percent.

A federal advisory panel has been named to review Internet taxation policy.

Source: John Simons, "States Chafe as Web Shoppers Ignore Sales Taxes," Wall Street Journal, January 26, 1999.


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