The rise in business conducted over the internet could cost state and local governments more than $54 billion in lost sales tax revenues by 2011, according to a new study.

Spurred by these latest figures, some state and local policy makers and education officials are urging Congress to intercede to help states collect sales taxes on items purchased online.

The study, released Oct. 2 by the Center for Business and Research at the University of Tennessee, also raises by 41 percent its previous estimate of sales tax losses from eCommerce in 2001, from $9.4 billion to $13.3 billion.

Published as Congress debates the future of taxes on the web, the new figures could influence the debate on Capitol Hill about whether states should be allowed to set up a simpler, streamlined system allowing collection of sales taxes on remote purchases.

These taxes are already imposed but are rarely collected, partly because of a Supreme Court ruling in 1992 that a business must have a physical presence in a state before it is required to collect that state’s taxes.

Congress is moving to extend a moratorium that expires Oct. 21 on internet access taxes and taxes that single out the internet. State and local governments, joined by a coalition of traditional retailers, say the moratorium measure should include permission to begin setting up a new sales-tax system.

“The current sales-tax system is not compatible with a 21st-century economy,” Utah Gov. Mike Leavitt, a Republican who co-chaired a congressional internet tax advisory panel, said Oct. 1 in a telephone interview with the Associated Press. “The states should be allowed to fix it.”

It’s an important issue for school districts, too, as they stand to gain—or lose—from the amount of revenue states are able to collect from online transactions.

The sales-tax study was commissioned by the Institute for State Studies, a Salt Lake City-based nonprofit organization that examines public policy related to technology.

Forty-five states and the District of Columbia currently levy sales taxes. Based on data from Forrester Research Inc., a leading eCommerce market research firm, the University of Tennessee study found that projected revenue losses from eCommerce in 2001 ranged from a low of $21 million in Vermont to a high of $1.75 billion in California.

By 2011, according to the study, Vermont’s losses would reach $87.2 million and California’s would top $7 billion. Total sales tax losses were estimated at $54.8 billion in 2011.

With losses of that magnitude, state and local governments would be forced to choose between raising taxes or cutting services such as education, law enforcement, and fire protection, the study’s authors said. Sales taxes, they said, would have to go up as much as 1.7 percentage points to compensate.

“When other factors causing sales-tax revenue to shrink are added in, the projected tax increases are even higher,” said William Fox, a University of Tennessee professor and study co-author.

The figures come at a time when many states are experiencing budget deficits as a result of the slumping economy. These shortfalls, it should be noted, follow several years of substantial surpluses in many states.

In Florida, which has been hit by a lack of tourism in the wake of the Sept. 11 terrorist attacks on the United States, Education Secretary Jim Horne is recommending that state legislators cut an ambitious $10 million plan to put leading-edge technology in some of the state’s classrooms.

Florida is projected to lose $932 million this year in sales tax revenue as a result of online purchases, according to the study.

Internet retailers say it would be impossible for them to comply with the current maze of state and local tax codes across the United States, and any new sales-tax structure would have to be crafted carefully to ensure that it doesn’t jeopardize the still-fledgling internet industry.

In an informal poll taken on the eSchool News web site early last year, 75 percent of readers said they opposed an internet sales tax on the grounds that it might hurt the growth and development of eCommerce. But a sampling of opinions after the University of Tennessee study was released suggested the tide has changed.

“Frankly, I would favor most anything that would provide more funding to expand the use of technology by children,” said Richard Melching, superintendent of the Evergreen School District in Clark County, Wash. “If [an internet sales tax] would do that, then I support it.” Ultimately, policy makers will have to decide a fair and equitable taxing practice for internet purchases, Melching said.

In Congress, the House appears likely to move ahead with a relatively simple extension of the internet tax moratorium that does not address the sales tax question. A bipartisan group of senators has been trying to reach accord on sales taxes but has been unable to do so.


University of Tennessee’s Center for Business and Research

Forrester Research Inc.,3257,1,FF.html