E-Commerce Cuts Into State Tax Revenues

KNOXVILLE — Untaxed Internet sales will hit Tennessee harder than most states because of its heavy reliance on sales taxes, a University of Tennessee study says.

UT economists Bill Fox and Donald Bruce projected how much tax revenue states will lose from e-commerce, which is expanding rapidly but is difficult or unconstitutional to tax.

The study estimates Tennessee lost $34 million in tax revenue to e-commerce in 1999, and will lose $293 million in 2003. That would be 2.5 percent of the state’s total tax revenues and the second highest percentage loss in the nation, Fox said. Texas is projected highest at 2.6 percent.

“We estimate about $10.8 billion in additional tax revenue losses nationwide in 2003 from e-commerce,” Fox said. “Tennessee is clearly one of the hardest hit states in terms of lost revenues.

“The research suggests people in states with high sales tax rates are more likely to use the Internet as a tax evasion mechanism. Tennessee gets hit harder than almost any other state because our sales tax rate is high, and it is so important to our economy.”

About two-thirds of Tennessee’s projected loss is from business to business commerce, with the remainder from consumer sales, Fox said.

In addition to Internet sales, the UT study says Tennessee is impacted more than most states by other untaxed purchases, such as mail order or telephone sales.

Fox presented study results for Tennessee and other states this week at a meeting of the National Tax Association and the Institute for Professionals in Taxation in Sarasota, Fla.

Fox said e-commerce should be taxed the same as purchases from conventional “brick-and-mortar” businesses because unfair tax advantages can upset the economy.

“If Internet transactions are taking place only because of a tax advantage, then it distorts the economy,” Fox said.

“If taxes drive our purchasing decisions rather than real economic concerns such as quality, service and price, then we don’t use the nation’s resources in the best way and it ultimately hurts the economy.”