Congress Struggling To Fix Sales Tax Problem

by Mike Godfrey, Tax-News.com, New York

04 October 2001

A study by the Center for Business and Research at the University of Tennessee released this week suggests that by 2011 state and local governments will be losing more than $54 billion a year in sales taxes through the migration of commerce to the internet. The study was commissioned by the Institute for State Studies, a Salt Lake City-based nonprofit organization that examines public policy related to technology.

The Center has also increased by 41% its previous estimate of sales tax losses in 2001, from $9.4 billion to $13.3 billion. The new figures could influence the debate on net taxes in Congress which is now gathering steam ahead of the expiry of the existing moratorium on internet taxes on October 21st. The states want legislation to be linked to recognition of the Streamlined Sales Tax Project, a plan to unify and simplify the nation's 7,500 sales and use tax jurisdictions. These taxes already apply to the internet, but are rarely collected on or off the net because of a Supreme Court ruling that a business must have a physical presence in a state before it has to collect the state's taxes.

'The current sales-tax system is not compatible with a 21st-century economy,' said Utah Governor Mike Leavitt, a Republican who co-chaired a congressional Internet tax advisory panel. 'The states should be allowed to fix it.'

Based on data from Forrester Research Inc. the University of Tennessee study found that projected revenue losses 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. Sales taxes would have to go up as much as 1.7% 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.

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 agreement on sales taxes but has so far not succeeded and seems unlikely to do so by October 21st.

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