Copyright 2000 Federal News Service, Inc.
Federal News Service
February 2, 2000, Wednesday
SECTION: PREPARED TESTIMONY
LENGTH: 6584 words
HEADLINE:
PREPARED TESTIMONY OF IRIS J. LAV DEPUTY DIRECTOR CENTER ON BUDGET AND POLICY
PRIORITIES
BEFORE THE SENATE BUDGET COMMITTEE
SUBJECT - INTERNET TAXATION IN THE NEW MILLENNIUM
BODY:
Mr. Chairman and Members of the
Committee, I am Iris Lav, Deputy Director of the Center on Budget and Policy
Priorities. I am accompanied today by Michael Mazerov, a Senior Policy Analyst
at the Center. The Center is a non-profit research institute that studies
government programs and policy issues that have an impact on low- and
moderate-income households. The question of whether state and local governments
will be able to apply their sales taxes to purchases made over the Internet has
important implications for the well-being of lower-income Americans. The Center
greatly appreciates the opportunity to present testimony on this issue this
morning.
The Internet Sales Tax Issue
The sales
tax is a critical revenue source for state and local governments. On average,
sales tax receipts comprise one-fourth of all the tax revenues state and local
governments use to finance education, health, human services, public safety, and
many other essential programs. Many states rely on sales taxes for an even
greater share of revenue.
In discussing sales taxation of Internet
purchases, it is important to keep in mind that the sales tax is intended to be
t and is- a tax on the purchaser of goods and services. That purchaser may be an
individual or a business. Although the sales tax is a tax on purchasers, state
and local governments frequently enlist sellers in the process of collecting the
tax. When a purchase is made in a local store, for example, the sales tax is
collected from the purchaser by the retailer at the time of sale and
periodically remitted by the retailer to the state.
The growth of
Internet, mail-order, and other "remote sales" in recent years represents a
significant revenue problem for state and local governments. A large majority of
the sales taxes due on remote sales are effectively uncollectible.1 These taxes
are uncollectible because a Supreme Court decision relieves mail order and
Internet businesses without a "physical presence" in a state of the obligation
that every store has to collect sale taxes from its customers and send them to
the state treasury.2
When a seller does not collect and send the tax to
the state of the purchaser, customers who receive the goods are supposed to pay
state and local sales taxes directly. Consumers are supposed to file a tax
return showing the value of the untaxed goods they have purchased from remote
sellers and to pay the tax on those purchases. More than one- third of the
states actually provide information and forms in their personal income tax
booklets to help consumers pay sales taxes on purchases from out-of-state
companies. Nonetheless, compliance with this self-remittance requirement is
minuscule in the case of individual consumers and spotty in the case of
businesses -- especially small businesses.
The combination of weak tax
compliance by consumers and the limited obligation of remote sellers to collect
taxes is eroding the sales tax base of state and local governments. As I will
discuss shortly, it is disproportionately upper-income households who are
avoiding paying their fair share of sales taxes by purchasing from remote
sellers. Both the revenue loss and the unfair tax advantages for the affluent
are likely to increase because of the still more rapid growth in Internet
purchasing that is projected to occur in the next few years.
Critical
Decisions Ahead
The Congress may be called upon this year to address the
taxation of remote sales. The Internet Tax Freedom Act (ITFA) enacted in October
1998 created an Advisory Commission on Electronic Commerce to study the issue.
The Commission is scheduled to submit its recommendations to Congress by the end
of April. All indications are that the Commission will be unable to muster the
required super-majority in favor of any particular package of recommendations
addressing the remote sales tax issue. Therefore, its final report seems likely
to offer a number of possible options for congressional action. Without
presuming to predict exactly what options the Commission will present, I want to
lay out what appear to be the fundamental choices the Congress may consider for
either maintaining the states quo or addressing state and local sales taxation
of Internet sales.
We look at two options that would continue or
increase the problems states face in attempting to tax fairly all like sales,
and increase the likelihood that sales taxes will disproportionately burden
lower- income purchasers. The other options, however, could help level the
playing field and apply the taxes evenly and fairly.
Option One:
Maintaining the Status Quo
One option Congress has is to do nothing, to
refrain from any enacting any new legislation addressing the Internet sales
taxation issue. Renewing the tax moratorium provisions of the Internet Tax
Freedom Act in their current form, as some have proposed, is actually a variant
of the do-nothing option; ITFA did not change current Supreme Court decisions
regulating the ability of states and localities to apply sales taxes to Internet
purchases. Even with ITFA in place, purchasers are still legally obligated to
self-remit sales tax on their Internet purchases, and a state can require an
Internet merchant to collect and remit sales tax to the state if the merchant
has a physical presence within the state's borders.
Maintaining the
status quo is likely to result in a continuing, steady erosion of state and
local sales tax revenues. There are two principal reasons for this. First,
Internet purchases are projected to grow sharply in coming years; Internet
consultants Forrester Research project $144 billion in Internet
purchases by individual consumers in 2003 and $1.3 trillion in
Internet purchases by businesses.3 These figures are seven times and twelve
times larger, respectively, than the estimates for 1999. Because of the legal
and practical barriers to effective taxation of Internet sales already
discussed, much of the tax due on these purchases will not be collected.
Congressional inaction on Internet taxation policy is also likely to
encourage more and more retailers that are currently collecting sales taxes on
their Internet sales to cease doing so. At present, there are major unanswered
legal questions regarding when so-called "clicks and mortar" businesses --
retailers with both e-commerce Web sites and conventional stores -- are
obligated to charge tax on their Internet sales. Most clicks-and-mortar
retailers charge sales tax to their Internet customers if the customers reside
in a state in which the retailer has a physical store. For example, you can
order from The Gap online, and in most states you will be charged the applicable
sales tax because The Gap has stores throughout the country. But a handful of
large companies have abandoned this practice. These companies structure their
Internet operations as separate subsidiaries and contend that they have to
collect sales taxes only in the few states in which the Internet sales
subsidiary itself has its headquarters or owns a warehouse. For example, Barnes
and Noble has bookstores throughout the United States, but Barnes and
Noble.corn, its affiliated Internet bookstore, collects sales taxes only from
customers located in New Jersey, New York, and Virginia.4
Even the
distinction between the physical store and the Internet subsidiary is becoming
blurred.
With each passing month, clicks-and-mortar companies are
expanding the use of their stores to stimulate sales on their Web sites and to
service customers who buy untaxed goods through the Internet. For example, one
major toy retailer recently starting encouraging its Internet customers to
return unwanted purchases at its stores? As time goes on, more and more
clicks-and-mortar retail chains are going to be tempted to play this game to
obtain a short-term advantage over their competitors, and their competitors are
likely to respond in kind. Eventually, few if any retail chains will be
collecting sales taxes on their Internet sales. In sum, perpetuation of the
status quo, under which states can only require physically-present retailers to
collect and remit their sales tax, is likely to lead to a steadily increasing
loss of state and local sales tax revenues.
Option Two: Enacting New
Restrictions on State Taxation of Internet and Mail-Order Sales
The
second option facing Congress is to constrain even more tightly the ability of
states and localities to tax Internet, mail-order, and other remote sales. There
are two leading types of proposals along these lines. The first type of proposal
would exempt all Internet purchases from state and local sales taxation. Bills
to accomplish this complete exemption have been introduced by Senator John
McCain and jointly by Representatives John Kasich and John Boehner.6 The second
type of proposal allegedly "codifies" and "clarifies" existing Supreme Court
decisions that define when a state can require an out- of-state business to
collect its sales tax and pay its corporate income tax. In fact, however, the
proposal goes far beyond codifying the status quo and includes important new
restrictions on the ability of states and localities to collect sales taxes.This
latter proposal was submitted to the Advisory Commission on Electronic Commerce
by one of its members, Dean Andal of the California State Board of
Equalization.7 Mr. Andal has indicated that he expects this proposal to be
introduced as a bill in Congress this session. These proposals would open up
gaping new loopholes in state sales tax systems that would enormously compound
the revenue losses arising from Internet commerce.
The Kasich/Boehner
and McCain bills would deprive states of the power they now have to require
purchasers to pay sales taxes themselves on their Internet purchases. Currently,
for example, states can effectively collect sales taxes on cars, planes, and
boats purchased out of state because registering the vehicle notifies tax
authorities that a taxable purchase has been made. But under both bills a
customer that purchased these vehicles over the Internet would be exempt from
paying sales taxes, even if he purchased it from a dealer in his own state.
The McCain/Kasich/Boehner and the Andal proposals would also severely
restrict the ability of states to require merchants to collect and remit sales
taxes in many instances in which states currently have the power to impose this
obligation. Under both proposals, for example, large retail chains would be free
to place computers in their stores linked to their Web sites. Customers could
examine the merchandise in the store and then order it using the in-store
computer; in a sense, placing the Internet order would substitute for check-out.
The orders would be delivered to customers' homes. Under the
McCain/Kasich/Boehner proposals, products purchased using an Internet- linked
computer in a retail store would be completely free of sales tax by law -- even
if the store and the purchaser's home are in the same state. The Andal proposal
would free the seller from having to charge the sales tax on Internet purchases
executed on a retail store computer so long as the purchase was delivered from
an out-of-state location. Unlike the McCain/Kasich/Boehner plan, however, under
the Andal plan states could still require purchasers to pay sales taxes on
Internet purchases made in stores -- with all the practical impediments to
compliance with this requirement previously discussed. Under both proposals, the
state/local revenue losses resulting from Internet purchases in retail stores
could be enormous.
The Andal proposal would have impacts far beyond
Internet commerce. For example, it would deprive states and localities of their
current ability to impose a sales tax collection obligation on companies like
Avon and Amway that have legions of door-to-door salespeople within their
borders,s In this respect the Andal plan would reverse a Supreme Court decision
dating back to 1944 -- rendering his claim to be "codifying" Supreme Court
decisions a highly misleading characterization of his proposal.9
In sum,
the second broad option available to Congress -- enacting new restrictions on
the ability of states to tax Internet purchases -- risks far-reaching and
perhaps unintended impacts on the conventional retail sales tax base.
Option Three: Trading State Sales Tax Simplification for an Expanded
Obligation of Internet and Mail-Order Merchants to Collect Sales Taxes
The third option available to Congress would be to enact legislation
that cuts through the tangle of rules now governing taxation of remote sales and
sets up rational, simple rules and procedures for collecting and remitting sales
taxes. This course is to take up the invitation offered to Congress by the
Supreme Court in its 1992 Quill decision on mail-order sales.
In Quill,
the Court made clear that Congress could empower states to require out-of-state
merchants to collect and remit sales taxes even if the merchants lacked a
physical presence within their borders. The Court reaffirmed the physical
presence requirement pending such congressional action. Proponents of
maintaining the status quo frequently argue that businesses do not benefit from
public services provided by states in which the businesses lack a physical
presence. The Quill Court dismissed that argument, recognizing that mail-order
companies like Quill would not be able to do business if states did not provide
the roads on which their goods make their way to customers and a legal system
that ensures that purchasers pay their bills.
The Supreme Court's sole
rationale for barring states from requiring remote sellers to collect and remit
sales taxes was the Court's belief that complying with the diverse sales tax
rules of several thousand state and local governments would excessively burden
interstate commerce. Thus, Congress has an option for addressing the Internet
and mail-order sales tax problem proactively by specifying a set of standards
that state sales tax laws would have to satisfy before states could require
remote sellers to comply with them.
The various "Tax Fairness for Main
Street Business" acts introduced by former Senator Dale Bumpers in previous
sessions of Congress could be the starting point for implementing this approach.
The Bumpers legislation largely focused on intra-state simplification of sales
tax laws.10 Those provisions could be expanded, for example, by mandating that
what is subject to sales tax in a particular state be identical for the state
sales tax and any sales taxes levied by local governments. This intra-state
standardization could be supplemented with inter-state standardization. For
example, the authority of states to require non-physically-present merchants to
collect and remit sales taxes could be conditioned on the use of common
definitions among all states for exempted goods, a standard format for state
sales tax returns, and similar ideas that have been identified in the course of
numerous discussions between industry and state tax authorities.
Finally, as proposed by Senator Bumpers and long supported by state and
local government groups, federal legislation could include an exemption for
small businesses from sales tax collection obligations in states in which they
lack a physical presence. Such a rule could remove the concern that
"mom-and-pop" businesses first getting into electronic commerce would not have
the resources or sophistication to collect and remit sales taxes on behalf of
numerous states.Option Four: Endorsing State and Local Government Efforts to
Develop a Technology Based Solution to the Remote Sales Problem
As just
discussed, one broad approach to solving the remote sales problem would involve
a quid pro quo. Internet and mail order merchants would have an "expanded duty
to collect" sales taxes only if states simplified and standardized sales tax
rules. This remains the approach being pressed by representatives of
brick-and-mortar retail interests.11 Until quite recently, it was also the
preferred solution of all the major organizations representing state and local
public officials. In just the past few months, however, these public sector
groups have offered a new, technology-based plan for addressing the remote sales
problem.
In mid-November, under the leadership of Utah Governor Michael
Leavitt, the National Governors' Association and the other major state and local
government organizations made a public commitment to develop and implement a
"Streamlined Sales Tax System for the 21st Century."12 State and local
government organizations intend to issue a Request for Proposals to the private
sector for the development of an entirely privatized sales tax collection
system.
Under such a system, one or more organizations (such as existing
credit card networks) would become intermediaries between remote sellers and
state tax authorities and, using software the firms would develop, would collect
tax from customers at the time a sale occurs and immediately remit it
electronically to the states. The intermediaries would be compensated for this
service through a small per-transaction fee. To make this work, remote sellers
would install on their computer systems software that would be furnished by the
intermediary and that would pass to the intermediary sufficient information to
ensure that the proper sales tax could be collected from the customer. To
simplify the development of the technology, state and local governments would
also implement the kinds of proposals discussed above to standardize sales tax
rules and definitions on both an intra- and interstate basis.
The state
and local government organizations have committed to developing the "Streamlined
Sales Tax System" on their own and piloting it with remote sellers that they
expect will volunteer to test it. They believe that in the long run the system
will be attractive enough to remote sellers that the vast majority will
voluntarily adopt it and that no federal legislation to compel adoption would be
needed. Nonetheless, some type of congressional endorsement of this approach in
the near term could make a crucial contribution to the ultimate success of the
NGA proposal. Without such an endorsement, remote sellers who want to perpetuate
the effectively tax-flee status of their sales may be tempted to scuttle
development of the technology by refusing to provide input on the features the
software would need to interface properly with their customer billing systems.
Even more important, the credit card networks, sales tax software developers,
and other potential builders of the "Streamlined System" may be reluctant to
make up-front investments if they are concerned that Congress will devalue those
investments by enacting even broader prohibitions on state taxation of Internet
purchases -- such as the Andal, McCain, or Kasich/Boehner proposals.Accordingly,
Congress could help clarify and improve the situation without enacting
legislation that would impose a solution on remote sellers or states and
localities. Congress could contribute to a resolution of the remote sales issue
by approving a "sense of the Congress" resolution that "backs" the voluntary
system that is under development. The resolution could contain the following
points: -- state and local governments have a right to impose the same sales
taxes on mail-order and Internet purchases that they impose on store purchases;
-- the only legitimate grounds for absolving remote sellers lacking a
physical presence within a state's borders from a sales tax collection
obligation is the compliance burdens such companies might face;
--
Congress encourages representatives of all segments of private industry to work
constructively with state and local officials to identify and implement changes
in state tax laws that could reduce those compliance burdens; and
--
Congress specifically supports the efforts of the NGA and governmental
organizations to develop a technology-based solution to the remote sales problem
that would almost completely eliminate the costs for merchants of collecting and
remitting sales taxes.
It contemplating such a resolution, members of
Congress should be reassured that there is strong public support for taxing
Internet and retail store purchases alike. A January 2000 USA Today/CNN/Gallup
poll found that 65 percent of Americans answered "yes" when asked: "Do you think
people should be required to pay the same sales tax for purchases made over the
Internet as they would if they had bought the item in person at a local
store?"13
The Consequences for Lower-Income Americans of Keeping the
Internet a Sales Tax Haven
The preceding discussion indicates that
congressional inaction or endorsement of the status quo on Internet sales
taxation is likely to result in a steady erosion of state and local sales tax
revenues. Rather than being eroded, much of the state and local sales tax base
could disappear down a massive sinkhole were Congress to enact the types of
restrictions on state Internet taxation authority being advocated by Mr. Andal,
Senator McCain, or Representatives Kasich and Boehner. Either course would have
serious adverse impacts on the well- being of lower-income Americans.
The Digital Divide: Real and Likely to Persist
If the de facto
sales tax exemption for Internet and mail-order sales is not eliminated or is
broadened, businesses and affluent households increasingly will avoid sales
taxes that lower-income households consigned w shopping in stores will continue
to pay. Lower-income consumers without the resources to shop on-line or by mail
are likely to end up paying an even more disproportionate share of state and
local sales taxes.
The ability to engage in Internet shopping requires:
-- ownership of a relatively complex, modem-equipped computer or Web TV
device and the knowledge to use it; -- an Internet access account subscription;
-- knowledge of how to navigate on the Internet and to find merchants;
-- ownership of a general-purpose credit card; and
-- access to
a secure place where purchases can be delivered if the intended recipient is not
at home.
For many poor and near-poor people in America, these
requirements in combination are likely to remain insurmountable barriers to
routine use of the Internet for shopping for the foreseeable future.
Many efforts to close the digital divide are focused on expanding access
to computers in public spaces such as schools and libraries. But it seems
unlikely that many low-income people would make special trips to libraries and
other public facilities to access the Internet for shopping -- even assuming
that the use of a limited supply of publicly-available computers for shopping
purposes would be permitted. Moreover, employers are increasingly cracking
down-on nonwork-related use of the Internet on the job.14 Thus, actual ownership
of an Internet-equipped computer or other Internet access device in the home is
likely to remain the price of admission to the cyber-mall.
At present,
households with incomes over $75,000 remain more than eight
times as likely to have home Internet access as households with incomes between
$10,000 and $15,000.15 It is little wonder,
then, that while households with incomes below $25,000 made 25
percent of all retail purchases in 1998, they made only 6 percent of on-line
purchases.'6
Part of the explanation for these gaps may be persistent
difficulties lower-income households have in obtaining credit to pay the
up-front costs of acquiring a computer. Ted Waitt, CEO of Gateway Computer, a
company specializing in direct sales of computers to individuals, recently
provided information to the Advisory Commission on Electronic Commerce about the
barriers many families face in obtaining sufficient credit to purchase a
computer:In... October of this year, Gateway-- our company-- refused 184,000
families credit for PCs. In the month of November, it was closer to 250,000
families that we declined credit for a PC. We called these people back and
surveyed them and found that they didn't get a PC anywhere else. They cannot get
credit .... And the number one reason they want to buy this PC is for their
children, so their children don't fall behind, and so they can get their kids on
the Internet?
The lack of a general-purpose credit card is also a
significant barrier to the ability of many lower-income families to engage in
on- line shopping. Many Internet service providers require a credit card to set
up an e-mail and Web access account for subscribers. Few Internet merchants yet
accept any of the various types of "electronic cash" accounts that have been
devised, which in any case often are established through a billing to a credit
card. The extent of this barrier is highlighted by a recent study of a sample of
EITC recipients in Chicago? According to the study, fully 60 percent of the EITC
recipients with incomes below about $13,000 had no
relationships with financial institutions of any type -- no savings account, no
checking account, no credit card, no loans or mortgage. About one- quarter of
the families with incomes between about $13,000 and about
$25,000 similarly had no contact with financial institutions.
For such families, use of the Internet for shopping would be virtually
impossible.
As the costs of computers and Internet access services
continue to drop, having a low income per se may prove less of a barrier to
accessing the Internet than it is at present.19 Even for families that could
accumulate enough money to acquire an Internet-equipped computer, however, a
lack of knowledge about how to use computers and navigate the Internet seems
likely to remain a continuing barrier to widespread acquisition of these devices
among less-educated, lower- income segments of the population.
The
latest (July 1999) U.S. Commerce Department study of the "digital divide" found
that 48.9 percent of households headed by someone who had completed college used
the Internet at home, whereas only 16.3 percent of households headed by someone
with a high school education did so. Only 6.3 percent of households headed by
someone who started but failed to complete high school used the Internet/20.
The gap in at-home Internet access between more- and less-educated
households actually grew between 1997 and 1998; for example the rate of home
Internet access by college-educated households exceeded that of high-school
drop-out households by 35.3 percentage points in 1997 and 42.6 percentage points
in 1998. Educational attainment in the population changes only slowly. Because
low educational attainment by household heads is closely associated with both
low rates of Internet use and low household income, for the foreseeable future
it seems likely that lower-income households will remain much less able to
access the Internet for shopping than more affluent households.21
The
persistent income gap in catalog shopping is the final piece of evidence
suggesting that low- and moderate-income households may continue to be less
likely than the affluent to shop on the Internet for a considerable period of
time. The barriers to catalog shopping are relatively low: the ability to read a
free catalog, fill out an order form, and visit a Post office or store where
cash can be converted into a money order. Despite these relatively low barriers,
only 29.3 percent of households with incomes below $25,000 shop
by catalog at present, more than 100 years after the Sears catalog came into
being?a Households with incomes above $80,000 are more than
twice as likely to shop from catalogs as the $25,000-and-under
income group. With the prerequisites for Internet shopping so much greater than
for catalog shopping, the digital divide between upper-income and lower- income
groups in on-line shopping seems likely to be wider and longer- lasting than is
sometimes asserted.
Paying a Disproportionate Share of Sales Taxes
and/or Higher Sales Taxes
If states and localities remain effectively
powerless to tax goods and services purchased through the mail and on the
Internet, the share of sales taxes paid by relatively affluent households and
businesses will decline. Lower-income households consigned to shopping in local
stores will consequently bear more than their fair share of sales taxes.
Furthermore, the erosion of the sales tax base resulting from on-line
purchasing by affluent consumers and businesses could compel states and
localities to raise sales tax rates to preserve a desired level of sales tax
revenues. A vicious cycle leading to ever-higher sales tax burdens on the poor
could ensue: tax rate increases could encourage more on-line buying by
businesses and the affluent, forcing further rounds of rate increases.
Ultimately, low- and moderate-income households unable to buy on-line could be
forced to devote more income to paying sales taxes money that could be used
instead for education, transportation, child care and other services the poor
need to participate in the labor force.
Reduced State and Local Services
Numerous studies project hundreds of billions of dollars in annual
purchases by consumers and businesses over the Internet just three to four years
from now. 23 Not all such purchases represent lost sales tax revenues to state
and local governments, of course; some will be purchases of goods and services
that are not taxed, and others represent purchases upon which the tax will be
remitted by the seller or the purchaser. Nonetheless, given current growth
projections for electronic commerce, state and local governments conservatively
could be losing $10 billion in tax revenues annually by 2003
from untaxed Internet sales -- this in addition to $5 billion
in annual sales tax revenue losses from traditional mail-order purchases?
Revenue losses would continue to mount thereafter; for example, one prominent
Internet industry forecaster projects a 70 percent increase in consumer Internet
purchases between 2003 and 2004.25 Sales tax revenue losses would be even more
severe if new restrictions on the ability of states to tax Internet and other
remote sales were enacted.
Revenue losses of this magnitude should be
regarded as significant by any objective standard. Fifteen billion dollars is
more than two and one-half times what state and local governments currently
spend each year on public libraries; it is the equivalent of
$50,000 salaries for 300,000 teachers?6 Revenue losses of these
magnitudes could significantly impair the ability of some states and localities
to meet demands for education, job training, child care, health, and other
services that low- and moderate-income families depend on to get ahead in an
increasingly technology-oriented economy.
Conclusion
If initial
steps are not taken soon to end the de facto sales tax exemption that applies to
most Internet and mail-order purchases, the sales tax burden on lower-income
Americans is likely to rise and the access of all citizens to high-quality
education and other critical state and local services could be impaired. These
outcomes will be all the more severe should Congress enact a blanket sales tax
exemption for Internet purchases or even tighter restrictions on the ability of
states to require remote sellers to collect and remit sales taxes than currently
exist. There is a practical alternative to both of these options. Congressional
endorsement of the principle of equal tax treatment of retail store purchases,
mail-order purchases, and Internet purchases could encourage the electronic
commerce and mail order industries to work constructively with state and local
governments toward a workable compromise. Such a compromise could achieve a
reduction in sales tax compliance costs for many businesses, while ensuring both
that no business or individual avoids paying a fair share of sales tax and that
state and local governments remain capable of financing necessary services.
Notes
1. Technically, the tax that is due on a purchase from an
out-of-state seller is a use lax, not a sales tax. However, the two taxes are
functionally equivalent.
2. Quill Corporation v. North Dakota (1992)
reaffirmed the physical presence requirement originally established in National
Bellas Hess v. Illinois (1967).
3. For business-to-consumer Internet
sales, see: Seema Williams, "Post-Web Retail," Forrester Research, September
1999. For business- to-business Internet sales, see: "The Online Revolution,"
Wall Street Journal, July 12, 1999, p. R6, reporting on Forrester Research
forecasts.
4. Form S-1/A for Barnes and Noble.com filed with the
Securities and Exchange Commission, March 18, 1999.
5. See:
www.kbkids.com/help/return.html. Kbkids.com collects and remits sales taxes only
in Colorado, Virginia, and Massachusetts. See: www.kbids.com/help/taxes.html.
6. S. 1611 (McCain) and H.R. 3252 (Kasich/Boehner).
7. A Uniform
Jurisdictional Standard: Applying the Substantial Physical Presence Standard to
Electronic Commerce; available at
www.boe.ca.gov/members/dandal/eleccom/pdf/proposal.pdf.
8. Mr. Andal's
proposed "Uniform Jurisdictional Standard" declares that a state may not require
an out-of-state business to collect and remit the state's sales tax if its
activities within the state's borders are limited to "the solicitation of orders
or contracts by such person.., for sales of tangible or intangible personal
property.., which orders or contracts are approved or rejected outside the State
and, if approved, are fulfilled by shipment or delivery of property from a point
outside the State .... "
9. General Trading Co. v. Iowa (1944).
10. See, for example, S. 1586., 105th Congress.
11. See the
World Wide Web site of the "E-Fairness Coalition" at www.e-fairness.org.
12. The proposal is available at
www.ecommercecommission.org/document/StreamlSalesTax 134.doc.
13. USA
Today, January 19, 2000. Twenty-eight percent of those polled responded "no" to
the question.
14. "Companies Move to Curb Web Surfing on the Job,"
Washington Post, December 20, 1999.
15. U.S. Department of Commerce,
Falling Through the Net: Defining the Digital Divide, A Report on the
Telecommunications and Information Technology Gap in America, July 1999, Chart
1-21, p. 25. Available at www.ntia.doc.gov/ntiahome/digitaldivide/.
16.
November 1998 Forrester Research, Inc. study summarized in "Digital Commerce:
The Issues," CQ Outlook (Congressional Quarterly), February 20, 1999, p. 14.
17. Transcript of the December 15, 1999 meeting of the Advisory
Commission on Electronic Commerce, pp. 444-445. Available at
www.ecommercecommission.org/sanfran/trl214.htm.
18. Timothy M. Smeeding,
Katherin E. Ross, and Michael O'Connor, The Economic Impact of the Earned Income
Tax Credit (EITC): Consumption, Savings, and Debt, September 1999.
19.
It should be noted, however, that computer prices are currently on the rise t at
least temporarily. See: "Reversing Course, Home PC Prices Head Higher," Wall
Street Journal, January 13, 2000.
20. Falling Through the Net, Table
I-4(d), p. 32.
21. The average 1998 earnings for an adult lacking a high
school diploma was $19,052; for a high-school graduate,
$28,742; for a college graduate, $55,057; and
for someone with a professional degree, $108,926. Census
Bureau, Money Income in the United States, 1998, September 1999.
22.
See: Catalog Age's 1999 Consumer Catalog Shopping Survey, available at
www.catalogagemag.com/ Magazines/CatalogAge/Survey/19990508.html.
23.
For forecasts of business-to-business Internet sales, see: Reuters, "E-Commerce
Revenue Seen at $1.1 Trillion by 2002," June 23, 1999 (Deloitte
& Touche estimate, www.news.com/News/Item/0,4,3825,00.html); "The Online
Revolution," Wall Street Journal, July 12, 1999, p. R6 (Forrester Research, Inc.
estimate); "B2B Commerce Boom Expected," (Yankee Group estimate,
cyberatlas.internet, com/market/professional/b2b.html.) For forecasts of
business-to-consumer Internet sales, see: "The Online Revolution, Wall Street
Journal, July 12, 1999, p. R6 (Jupiter Communications); "Internet Retail Sales
in '99 Are Expected to Double," Wall Street Journal, May 18, 1999, p. A4 (Direct
Marketing Association estimate); Seema Williams, Forrester Research,
"Synchronous Selling," Presentation to the Federation of Tax Administrators'
Annual Meeting, June 7, 1999.
24. Harley Duncan, Executive Director of
the Federation of Tax Administrators, has taken projections of consumer Internet
purchases in 2003 prepared by Forrester Research, Inc. and shown that they imply
as much as $4 billion in lost state and local sales tax
revenues in that year. (See: "State Revenue Losses from E-Commerce
Underestimated," State Tax Notes, July 26, 1999, p. 245. Forrester recently
predicted that consumer Internet purchases in 2004 would be
$184 billion, 70 percent greater than the $108
billion forecast for 2003 that formed the basis of Duncan's estimate. See: Seema
Williams, "Post-Web Retail," September 1999, available at
www.forrester.com/ER/Research/Report/0,1338,7772,FF.html.)
Like most
industry analysts, Forrester expects business-to-business sales over the
Internet to remain many times larger than consumer purchases. Forrester
currently projects $1.3 trillion in U.S. business-to-business
Internet sales in 2003. (See: "The Online Revolution," Wall Street Journal, July
12, 1999, p. R6.) If just one- third of these sales represent items that would
be subject to state and local sales taxes, and if it is assumed that just
one-third of the taxes due on this one-third of sales would go uncollected, then
the 2003 revenue loss from untaxed business-to-business Internet sales (at the
average 6.5 percent tax rate used by Duncan) would be $9.6
billion. (Assuming that one-third of the $1.3 trillion would be
subject to sales tax seems reasonable. Computers, industrial equipment, office
supplies, and shipping supplies alone account for 40 percent of the total; such
items generally do not qualify for sales tax exemptions). Combining the
$9.6 billion in lost revenues on business-to-business sales
with the $4 billion in lost revenues on consumer purchases
estimated by Duncan yields $13.6 billion. Thus, an estimated
$10 billion total revenue loss from untaxed Internet sales in
2003 appears reasonable, if not conservative.
The U.S. Advisory
Commission on Intergovernmental Relations estimated the nationwide state and
local government revenue loss from untaxed mail order sales in 1994 at
$3.3 billion. (See: Taxation of Interstate Mail Order Sales,
1994 Revenue Estimates.) According to the Direct Marketing Association, catalog
sales grew 8.6 percent annually between 1994 and 1999. (See: Reuters, "Internet
Sales, Ad Spending Seen Climbing Sharply," May 19, 1999, available at
news.excite.com/news/r/990519/02/net-internet-marketing.html.) If all forms of
direct marketing matched the growth in catalog sales during the 1994-9 period
and the share of all such sales going untaxed remained constant, a rough
estimate of untaxed mail order sales in 1999 would be $5
billion.
25. See the first paragraph of note 24.
26. According
to the U.S. Census Bureau, state and local governments combined spent
$5.7 billion on libraries in FY95-96, the most current fiscal
year for which data are available. See:
www.census.gov/ftp/pub/govs/estimate/96stlus.txt.
END
LOAD-DATE: February 3, 2000