Estimated non-collectable sales tax on E-commerce in America

State and local sales tax bases in the U.S.A. are shrinking for three reasons, say researchers: the expanded use of untaxed services, sales tax exemptions and the growth of remote sales – including e-commerce (Internet), and telephone and catalogue sales.

States have responded to the narrowing tax bases by raising tax rates, say researchers, although the extent of a direct relationship has not been carefully studied.

  • For the average sales-taxing state, the tax base equalled 51.4 percent of the state's personal income in 1979, but had fallen to 42.0 percent in 2000.

  • The median state sales tax rate increased from 3.25 percent in 1970 to 4.0 percent in 1980 and to 5.0 percent in 1990.

    Using the most recent forecasts by Forrester Research, Inc., a new study focuses on the effect of e-commerce on the erosion of the sales tax base. Researchers estimated both the total e-commerce loss – the sales tax loss on all Internet sales – and the new (or incremental) sales tax loss –which excludes tax losses when other means of remote sales, such as telephone and catalogue sales, could have been substituted.

  • In 2001, there are expected to be $208.5 billion in e-commerce sales on which sales taxes due cannot be collected – out of total Internet sales of $754.6 billion.

  • That will likely cause a total state and local revenue loss in 2001 of $13.3 billion, of which $7.0 billion is due to e-commerce; the other $6.3 billion would have been lost even in the Internet's absence.

  • In 2006, total and new revenue losses are projected at $45.2 billion and $24.2 billion, respectively.

  • In 2011, the total and new revenue loss estimates are $54.8 billion and $29.2 billion, respectively.

    Source: Donald Bruce and William F. Fox, State and Local Sales Tax Revenue Losses from E-Commerce: Updated Estimates, September 2001, Center for Business and Economic Research, 100 Glocker Building, University of Tennessee, Knoxville, Tennessee 37996, (865) 974-5441.

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    RSA Note:
    Government responses to non-collectable taxes resulting from technological advances will have to change. A fundamental review of government functions and the quantum and bases of taxation has become increasingly necessary. A critical review is likely to reveal that a narrowing of government functions and concomitant reduction in both the forms and levels of taxes should occur. Studies have shown that developed countries spend about 12% to 15% of GDP on their core functions for all levels of government, whereas their total spending amounts to anything from 36% to almost 60% of GDP. All the other functions could be carried out more efficiently and at a lower cost by private firms and institutions, either charging for services or relying on voluntary philanthropy in the case of services to the indigent. All functions should be viewed on a fee-for-service basis to evaluate whether government retention of the function can be justified and the sources of funding for retained services should be se-evaluated with this basis in mind. Much lower and simplified taxes should result from any honest appraisal.

    Eustace Davie, Director, FMF.

    FMF\16 October 2001
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