E-COMMERCE SALES TAX REVENUE LOSSES

Executive Summary

The sales tax base for state and local government is shrinking because of the expanded use of services which are not subject to sales tax and continued legislatively-granted exemptions. The erosion is also due to growth of remote sales including those made through e-commerce (Internet), the telephone and catalogs.

The extent to which e-commerce reduces state and local sales tax collections continues to be an important issue. As in our earlier work in this area, we focus on the e-commerce losses, recognizing them as furthering the trend erosion. In this brief, we present an update of our earlier revenue loss forecasts (Bruce and Fox, 2000). Sales tax losses by state are given for 2001, 2006, and 2011. The estimates reported here are based on the most recent forecasts of e-commerce sales for 2001 through 2011, provided by Forrester Research, Inc. Our previous report went through 2003.

For 2001, the dollars lost are 41% more than our previous report had indicated due to higher business-to-business (B2B) transactions forecast by Forrester. In 2001, e-commerce is likely to cause a total state and local government revenue loss of $13.3 billion. By 2006, the loss will more than triple to $45.2 billion and in 2011, the loss will be $54.8 billion. The total e-commerce loss is the sales tax loss on all sales over the Internet. Part of the loss would have occurred anyway even without e-commerce on sales, for example, which might have otherwise been made by purchasers using the telephone and catalogs.

The new e-commerce loss is from sales made through the Internet both on goods that would have otherwise been purchased from the over-the-counter method and projected new goods that will be purchased over the Internet. In 2001, the new e-commerce loss is $7 billion, in 2006 it grows to $24.2 billion, and in 2011 it is $29.2 billion.

Measuring the states e-commerce revenue losses against their total state tax revenues also shows significant impact. In 2011, states will lose anywhere from 2.6 percent to 9.92 perc ent of their total state tax collections to total e-commerce losses.

A final measurement of the impact of e-commerce losses is the needed increase in the sales tax rate to replace the lost revenue. In 2011, rates will have to rise by between 0.83 and 1.72 percentage points to replace the total e-commerce losses. The revenue impacts are significant.