According to a study issued March 13, reports that an untaxed Internet equals potentially large losses in state tax revenues are exaggerated, and taxes that are levied in the future against e-tailers will not translate into the big payoffs that are anticipated by those states that favor cybertaxes.
According to the Direct Marketing Association (DMA), which authored the study, it's that exaggeration that was used to create a political crisis rather than solve a legitimate economic problem. "If states claim there is a policy emergency arising from the growth of e-commerce, the best available growth rate numbers show a very different picture," says the Direct Marketing Association. "If there is a leak to state treasuries at all, it is growing only incrementally."
"I would say yes," said Eric J. White, chief executive officer of Pennsylvania-based VirtualSexMachine.com, when asked if he thinks the states exaggerate the extent to which Internet sales drain away potential state tax revenues. "If anybody pushes the idea in front of me, they're sure not going to get my vote."
The DMA produced the study with a number of online, offline, and catalog companies. The study says that the states may have overstated by 85 percent the actual uncollected sales tax revenues they stood to face by way of e-commerce.
"For example, in 2001, the states reported that approximately $13 billion went uncollected due to their inability to force out-of-state retailers to act as their unpaid tax collectors," the DMA said in a statement given with the study's release. "In fact, the total amount potentially uncollected was about $1.9 billion." The group also said that widely cited studies from the University of Tennessee "erroneously relied" on information gathered during the Internet boom, "and made flawed assumptions about e-commerce that resulted in their vast over-estimates."
Those included a failure to distinguish business-to-business Net activity from pre-existing business-to-business commerce, the DMA continued, as well as excessively low rate-of-business compliance on remitting sales taxes, and failing to record a fall in so-called "pure-play" e-tail in favor of "bricks and clicks. All of these factors resulted in excessively high estimates of how much the states were losing financially from Internet sales."
The Tennessee study is sometimes thought to have had a political impetus of its own - it was commissioned by a think tank called the Institute for State Studies, whose founder is Utah Governor Michael Leavitt, one of the nation's most outspoken advocates of Internet sales taxes. A few years ago, Leavitt made his reputation as a key leader of the e-tax coalition within the National Governors' Association, when that group began studying the Internet tax issue seriously.
Last November, a group of tax officials and lawmakers from thirty states, including the District of Columbia, signed onto a voluntary deal to collect sales taxes on e-tail purchases. The latest legislative move on Net taxes came March 12, when New York's Republican-led state Senate passed a bill that would give the state the power to collect e-tail taxes. That bill has a resistor in New York's top Republican, Gov. George Pataki…so far.
The U.S. Supreme Court has ruled that no state can force any business to collect sales taxes for that state unless the business has an actual, physical presence within the state, and there remains a federal moratorium on Internet-only taxes through November 2003.
DMA president H. Robert Wientzen said that Congress shouldn't even think about "overturning the long and successful history of the Interstate Commerce Clause" without looking at the entire picture. "The analysis of Internet economic activity in America that we released today demonstrates without a doubt that there is - despite what a lot of state politicians are claiming - no pot of gold for the states in creating new burdens for remote retailers," he said in a statement.
Wientzen said the state budget deficit issue is real enough but federal lawmakers shouldn't be duped into thinking that the Internet is to blame. "(T)he last time the states came knocking on Congress' door asking for the power to force out-of-state businesses to collect states' sales taxes, most of them were running record surpluses," he said. "Furthermore, the so-called simplification proposal that the states have been trying to pass - in the hopes of winning Congressional support - is anything but simple."
Forrester Research has said 2002 Internet sales swelled to about $80 billion, accounting for three percent of all retail sales.
But Wientzen said the real issue is whether the states can achieve meaningful tax simplification and fiscal control. And he also questioned why they might still be pushing for federal Internet sales tax legislation, since the states can tax without Congress's say-so. "What the states now are seeking in Congress will lead to burdensome costs and administrative complications that, ultimately, will be shouldered by consumers at a time when the economy can least afford them," he said in his statement.
One of those burdens includes yet-to-be-developed software needed by "almost every business in America to manage its cumbersome obligations to 7,600 taxing jurisdictions," software that could cost as much as $25,000 a license and $60,000 a setup, Wientzen added.
According to White, that kind of new e-tax management and compliance burden would be "unmanageable, a nightmare. Oh, my God, multiply it times fifty. And that's just the state taxes, forget the local taxes. Here in Pennsylvania, we have Philadelphia, and Bucks County has some kind of (sales tax) deal down there. The state alone has a six percent sales tax."
