UT Study: States Losing Billions To Internet Sales

States stand to lose up to $33.7 billion by 2008 in tax revenue not paid on Internet sales and other electronic commerce, a University of Tennessee study says.

The UT Center for Business and Economic Research says projected losses aren’t as great as forecast in previous studies but still represent a significant loss to state and local government.

In 2008, Tennessee could lose up to $958 million in tax revenues to e-commerce sales, the study found.

“We estimate the 2008 revenue loss for state and local government to range between $21.5 billion and $33.7 billion,” a report on the center’s findings says. “The 2008 losses represent between 3.9 and 6.1 percent of actual 2003 actual state tax revenues.”

For the current year, total sales tax losses are projected to be as high as $20.4 billion, the report says.

“Our findings are based on lower estimates of e-commerce, so the result is a smaller revenue loss than in earlier estimates,” Dr. William Fox, UT economics professor and head of CBER, said. “Our loss estimates are also lower because many more vendors have begun to collect sales tax and use taxes on their remote sales.”

Fox and Dr. Donald Bruce, CBER research assistant professor, also did estimates on e-commerce tax losses in 2000 and 2001.

In the latest report, the UT researchers generated estimates using low-growth and high-growth scenarios. The range for 2004 is $16.8 billion to $20.4 billion. Comparable numbers for 2003 were $15.4 billion and $16.1 billion.

“Firms have an incentive to locate production and sales activity to avoid tax collection responsibility and that imposes economic losses on the overall economy,” he said. “The sales tax becomes more regressive as those who are least able to purchase online are more likely to pay sales tax than those who purchase online more frequently.”

Bruce and Fox based their forecasts on national e-commerce transactions from 2003 to 2008 and then allocated revenue losses to the individual states.

The researchers used information prepared by Forrester Research Inc. for the National Governors Association and the National Association of State Legislatures.

Click here for a copy of the report.