NCPA - National Center for Policy Analysis

States Cast Covetous Eye at Internet Sales Taxes

January 27, 2003

Faced with huge budget shortfalls, officials and politicians in some states are closely watching the growth in online purchases and dreaming of the revenues they could raise if only they could collect taxes on those sales.

  • Online retailers rang up sales of $78 billion last year -- an increase of more than 50 percent over 2001.
  • That does not include the larger categories of business-to-business online sales and catalog sales -- for which sales tax is generally not collected.
  • A study by the University of Tennessee estimates that sales taxes are not collected on $234 billion in online business-to-business commerce .
  • And taxes on what the Direct Marketing Association estimates at $125 billion in annual catalog sales is not collected, either.

States cannot currently impose these taxes because the Supreme Court has ruled that their multiple tax systems would impose an unfair collection burden on retailers that do not have a physical presence in their buyers' various states.

Online buyers are actually required to pay sales taxes directly to their states -- but they rarely do.

If the states simplify and coordinate their sales tax systems, they may be able to convince Congress or the courts that collecting the levy will not be an unfair burden.

Indeed, 33 states so far have agreed to narrow the differences in their sales tax rules and to provide retailers with software to collect taxes. Meanwhile, however, anti-tax groups have been forming coalitions to maintain the status quo or at least obtain concessions on other tax issues in return for their support of the collection changes.

Source: Norm Alster, "So Many Online Sales, So Little in Tax Revenue," New York Times, January 26, 2003.


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