E-Commerce Taxes: No Big Deal

The growing acceptance of e-commerce has raised important tax policy issues for state and local governments, consumers, and retailers, but a study conducted by Ernst & Young had found that e-commerce has very little influence on taxes in 1998.

The study “The Sky is Not Falling: Why State and Local Revenues Were Not Significantly Impacted by the Internet in 1998” estimates that sales and use taxes not collected in 1998 from Internet sales were less than $170 million. This only 0.1 percent of total state and local government sales and use tax collections.

The e-commerce tax issue has caused state and local officials to express concern over losses incurred from the state and local sales tax. Firms involved in e-commerce are concerned about the possible administrative and compliance costs of dealing with different sales and use tax systems with various rates applied to different bases for each state, city, county, and local government.

“This study demonstrates that tax revenues for state and local governments are being minimally affected by e-commerce,” said Dr. Thomas S. Neubig, national director of policy economics at Ernst & Young. “There is time to construct a fair, efficient, and administrable tax system for both businesses and state and local governments for the 21st Century.”

According to the study, the small effect of Internet commerce on state and local taxes is due to the tax treatment of different categories of e-commerce. The most significant factors include:

  • An estimated 80 percent of e-commerce is business-to-business sales that are either not subject to sales and use taxes or are effectively subject to use tax payments by in-state business purchasers
  • An estimated 63 percent of e-commerce business-to-consumer sales are intangible services, such as travel and financial services, or exempt products, such as groceries and prescription drugs, which generally are not subject to state and local sales and use taxes.
  • An estimated 60 percent of taxable sales are substituting for purchases from other remote sellers, such as mail order and telemarketers, that do not generate sales and use tax collections and do not result in reduced sales and use taxes.
  • An estimated 11 percent of taxable e-commerce retail sales result in taxes being paid by either vendors or customers.

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