Study Says Internet Tax Losses Overstated

U.S. states lost $2.8 billion last year in uncollected Internet sales taxes, much lower than previous estimates, according to a study released by the Direct Marketing Association (DMA).

Other studies have confused different types of online transactions and relied on fuzzy numbers to arrive at their figures, according to the DMA.

As a result, the amount of potential revenue that cash-strapped states are missing out on has been grossly overstated, report author Peter Johnson said.

'The Internet is not creating a massive leak in state coffers,' Johnson, a DMA economist, writes in the report.

Many states worry that their revenues will shrink as residents turn increasingly to the Internet to make purchases.

A 1992 Supreme Court decision prohibits states from collecting taxes on out-of-state retailers unless they have a physical presence in the state. Quill Corp. v. North Dakota, 504 U.S. 298; 112 S.Ct. 1904; 110 L. Ed. 2d 91(1992). That meant $13.3 billion in lost revenues in 2001, according to a University of Tennessee study.

Actual losses are probably closer to $2.5 billion for that year, the DMA said.

The DMA report estimates that states will miss out on $4.5 billion in tax revenue in 2011, while the University of Tennessee report estimates that states will lose $54 billion.

While the University of Tennessee study used sales estimates compiled by Forrester Research at the height of the dot-com bubble, the DMA used actual sales figures compiled by the Commerce Department and relied on a more conservative growth estimate, the report says.

The DMA also factored out business-to-business sales made over the Electronic Data Interchange network, or EDI, a decades-old proprietary system used by large businesses to manage orders from suppliers. Users of this system, which still handles most wholesale e-commerce transactions, almost always report and pay taxes on these purchases, the DMA said.

State governments have sought to simplify their sales-tax codes with the hopes that Congress will allow them to tax online sales, and some large retailers, including Target and Wal-Mart, have begun voluntarily collecting taxes on their own.

Samuel Fineman, Esq. is the Editor-in-Chief of this publication. Information from Reuters contributed to this article.

U.S. states lost $2.8 billion last year in uncollected Internet sales taxes, much lower than previous estimates, according to a study released by the Direct Marketing Association (DMA).

Other studies have confused different types of online transactions and relied on fuzzy numbers to arrive at their figures, according to the DMA.

As a result, the amount of potential revenue that cash-strapped states are missing out on has been grossly overstated, report author Peter Johnson said.

'The Internet is not creating a massive leak in state coffers,' Johnson, a DMA economist, writes in the report.

Many states worry that their revenues will shrink as residents turn increasingly to the Internet to make purchases.

A 1992 Supreme Court decision prohibits states from collecting taxes on out-of-state retailers unless they have a physical presence in the state. Quill Corp. v. North Dakota, 504 U.S. 298; 112 S.Ct. 1904; 110 L. Ed. 2d 91(1992). That meant $13.3 billion in lost revenues in 2001, according to a University of Tennessee study.

Actual losses are probably closer to $2.5 billion for that year, the DMA said.

The DMA report estimates that states will miss out on $4.5 billion in tax revenue in 2011, while the University of Tennessee report estimates that states will lose $54 billion.

While the University of Tennessee study used sales estimates compiled by Forrester Research at the height of the dot-com bubble, the DMA used actual sales figures compiled by the Commerce Department and relied on a more conservative growth estimate, the report says.

The DMA also factored out business-to-business sales made over the Electronic Data Interchange network, or EDI, a decades-old proprietary system used by large businesses to manage orders from suppliers. Users of this system, which still handles most wholesale e-commerce transactions, almost always report and pay taxes on these purchases, the DMA said.

State governments have sought to simplify their sales-tax codes with the hopes that Congress will allow them to tax online sales, and some large retailers, including Target and Wal-Mart, have begun voluntarily collecting taxes on their own.

Samuel Fineman, Esq. is the Editor-in-Chief of this publication. Information from Reuters contributed to this article.