CRS Reports on Internet Commerce
RL31252
- AuthorsMaguire, Steven
- Institutional AuthorsCongressional Research Service
- Subject Area/Tax Topics
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 2002-2344 (16 original pages)
- Tax Analysts Electronic Citation2002 TNT 20-15
CRS REPORT FOR CONGRESS
ORDER CODE RL31252
January 18, 2002
Economist
Government and Finance Division
Summary
[1] In theory, state sales and use taxes are based on the destination principle. The destination principle prescribes that taxes should be paid where the consumption takes place. Sales taxes collected at the point of sale achieve this if consumption takes place near the point of transaction, which is usually a valid assumption. Alternatively, consumers owe a use tax on products purchased out-of-state and used in their home state where consumption likely takes place.
[2] However, under current law, states cannot reach beyond their borders and compel out-of-state vendors without nexus in the state to collect the use tax owed by state residents. The Supreme Court has ruled that requiring remote vendors to collect the use tax would pose an undue burden on interstate commerce. States are concerned because they anticipate gradually losing more tax revenue as the growth of Internet commerce allows more residents to buy products from vendors located out-of-state and evade use taxes. Generally, "Internet taxes" are existing use taxes and taxes on Internet access services.
[3] The size of the revenue loss from Internet commerce and subsequent tax evasion is uncertain. The General Accounting Office estimates that the state revenue loss in 2003 could be from $1 billion to $12.4 billion. States that rely more heavily on the sales and use tax will likely lose more revenue than states less reliant on the sales and use tax.
[4] Congress is involved in this issue because commerce conducted by parties in different states over the Internet falls under the Commerce Clause of the Constitution. Currently, an "Internet Tax Moratorium" prohibits 1) new taxes on Internet access services, and 2) multiple or discriminatory taxes on Internet commerce. This moratorium was created by the Internet Tax Freedom Act (ITFA) of 1998 and had expired on October 21, 2001. Congress extended the "Internet Tax Moratorium" through November 1, 2003, with P.L. 107-75, enacted on November 28, 2001.
[5] The degree of congressional involvement is an open question. Congress could do nothing and allow the moratorium to expire and not address the use tax issue. Or, Congress could: 1) extend the moratorium (or make it permanent) and/or 2) address the use tax issue. Opponents of remote vendor use tax collection responsibility would support a permanent moratorium and a clearer definition of nexus for use tax purposes. In contrast, many state officials are opposed to a permanent moratorium and would like Congress to change the law and require out-of-state vendors without nexus to collect state use taxes. Simplification and harmonization of state tax systems are likely prerequisites for Congress to consider approval of increased collection authority for states. This report will be updated as legislative events warrant.
Contents
Introduction
Background
A Brief History of the Sales and Use Tax
What are "Internet Taxes"?
Two Components of the Sales and Use Tax
Tax Base
Tax Rate
Internet Taxes: Economic Issues
Efficiency
Equity
Sales Tax Reliance
State Revenue Loss Estimates
Policy Options
Passive Approach
Active Approach
List of Tables
Table 1. State General Sales and Gross Receipts Taxes as Percent of
Total Personal Income, by State, FY2000
Table 2. Reliance on the Sales and Gross Receipts Tax, by State,
FY2000
State Sales and Use Taxes
Introduction
[6] State governments rely on sales and use taxes for approximately one-third (32.3%) of their total tax revenue -- or approximately $174 billion in FY 2000.1 Local governments derived 16.4% of their tax revenue or $51.6 billion from local sales and use taxes in FY 1999.2 Both state and local sales taxes are collected by vendors at the time of transaction and are levied at a percentage of a product's retail price. Alternatively, use taxes are not collected by vendors if they do not have nexus (loosely defined as a physical presence) in the consumer's state. Consumers are required to remit use taxes to their taxing jurisdiction. However, compliance with this requirement is quite low. Because of the low compliance, many observers suggest that the expansion of the internet as a means of transacting business across state lines, both from business to consumer (B to C) and from business to business (B to B), threatens to diminish the ability of state and local governments to collect sales and use taxes.
[7] Congress has a role in this issue because commerce between parties in different states conducted over the Internet falls under the Commerce Clause of the Constitution.3 Congress can either take an active or passive role in the "Internet tax" debate. This report intends to clarify important issues in the Internet tax debate.
Background
[8] A Brief History of the Sales and Use Tax. In 1932, Mississippi was the first state to impose a general state sales tax.4 During the remainder of the 1930s, an era characterized by declining revenue from corporate and individual income taxes, 23 other states followed suit and implemented a general sales tax.5 At the time, the sales tax was relatively easy to administer and could raise a significant amount of revenue with a relatively low rate.6 Given the relative success of the sales tax in raising revenue, 45 states and the District of Columbia added the sales tax to their tax infrastructure by the late 1960s. The last of the 45 states to enact a general sales and use tax was Vermont in 1969.7
[9] What are "Internet Taxes"? Over the last several years, a number of bills have been introduced in Congress that address "Internet taxes"8 For this report, and in the majority of the legislation introduced, "Internet taxes" refer to two sub-federal taxes: state sales taxes on Internet access services (sometimes referred to as Internet access taxes) and state sales and use taxes on products purchased over the Internet.9 Internet access taxes, in state where they exist, are typically a sales tax (or gross receipts tax, GRT) on Internet access services.10 The Internet Tax Freedom Act (ITFA) defines Internet access service as a service " . . . that enables users to access content, information, electronic mail, or other services offered over the Internet. . . ."11 The economic burden of an Internet access tax is shared by access providers (such as America Online and the Microsoft Network) and consumers of Internet services.
[10] The recently passed extension of the Internet tax moratorium (P.L. 107-75) prohibits taxes on Internet access unless they existed before the original passage of the ITFA in October 1998. The extension of the moratorium expires November 1, 2003. A permanent prohibition of Internet access taxes would prevent state and local governments from ever assessing a sales tax (or GRT) on the provision of these services.
[11] The second type of "Internet tax" is the imposition of the sales and use tax on transactions arranged over the Internet. The expanding acceptance of the Internet as an alternative to traditional retail transactions has complicated the collection of this tax. Generally, if a vendor does not have "nexus" (loosely defined as a physical presence) in the buyer's home state, then the vendor is not required to collect the sales or use tax. In these situations -- where the vendor does not have nexus -- the buyer is required to remit a use tax to his or her state government. In reality, consumer compliance with this requirement is quite low. Thus, contrary to what some observers say, Internet purchases are "tax-free" only in the sense that consumers are evading the use tax due on those transactions.12
[12] The variation among the state and local governments in the administration of the sales tax is at the center of the Internet tax debate. The U. S. Supreme Court has ruled that the collection of sales taxes by remote vendors would be too burdensome; there are thousands of taxing jurisdictions, each with its own rates and base. In an effort to minimize that administrative burden, many states are working together to simplify and standardize their tax systems in the hope that Congress will grant them the authority to require remote vendors to collect the sales tax. Simplification of sales and use taxes will be difficult because of the extensive variation among states in the administration of the sales and use tax. Some of the issues that will likely arise in the Internet tax debate are explored below.
Two Components of the Sales and Use Tax
[13] The revenue that a sales and use tax generates, assuming a given level of compliance, depends upon the chosen rate and the base to which the rate applies. The more narrow the base the higher the rate must be to raise an equivalent amount of revenue. States often have similar consumption items included in their tax base, but they are far from uniform. Tax rates can also vary considerably, depending on the state's reliance on other revenue sources.
[14] Tax Base. The sales tax, which is often considered a consumption tax, is perhaps better identified as a transaction tax on tangible personal property. The sales tax is normally considered to be a general consumption tax, although expenditures on Internet access, legal, and medical services are often excluded from the state sales tax base.13 In many states, groceries are also exempt from the sales tax or taxed at a lower rate (see Table 1). A true consumption tax would include all income that is not saved, including personal expenditures on services.14
[15] Business-to-business transactions are often exempt from the retail sales tax, particularly in cases where the purchaser is using the good as an input to production. These transactions are exempt because including the transactions could lead to the "pyramiding" of the sales tax. For example, if a coffee shop were to pay a retail sales tax on the purchase of coffee, and then impose a retail sales tax on coffee brewed for the final consumer, the total sales tax paid for the cup of coffee would likely exceed the statutory rate. Products that a business purchases for resale are typically not assessed a retail sales tax for a similar reason. If a coffee shop buys beans only for resale, levying a sales tax on the wholesale purchase of the beans and then on the retail sale would more than double the statutory rate. Tax treatment of business to business transactions is not uniform across states and would likely require some standardization as part of any simplification plan.
[16] Many individuals and organizations are also exempt from state sales taxes. Entities wishing to claim the sales tax exemption are often issued a certificate indicating their tax-free status and are required to present this certification at the point of transaction. Non-profit organizations, such as those whose mission is religious, charitable, educational, or to promote the public health, often hold sales tax-exempt status. Each state has a different list of exempt entities.
[17] Tax Rate. The second component of a sales tax is the tax rate applied to the base described in the previous section. In 32 states, local governments piggy-back a local sales tax (which often varies among localities) on the state sales tax; another 13 states and the District of Columbia levy a single state rate (see Table 2) with no local taxes. Some states in the group of 32 may collect a uniform local tax along with the state tax and send the local revenue share back to the localities. This structure would look like a single rate to the consumer because vendors do not differentiate between the state and local share. For example, vendors in Virginia levy a 4.5% sales tax on purchases and remit the entire amount to the state. The state then sends what would have been raised by a 1% tax back to the county where the tax was collected. The state of Virginia keeps the remaining 3.5%.
[18] Generally, states with a broader base can collect the same amount of revenue at a lower rate than a state with a narrow base. Mississippi and Rhode Island have the highest state sales tax rate of 7%. However, Oklahoma has the highest potential combined state and local rate of 9.75%. Residents in high sales tax rate jurisdictions gain from Internet purchases (and tax evasion) more than those in low tax rate states. Recognizing this potential revenue drain, many states have stepped up efforts to inform consumers of their responsibility to pay use taxes on internet and mail-order catalog purchases.15 As suggested earlier, states with high rates -- and whose residents have a greater incentive to evade taxes -- are exposed to greater potential revenue losses from the growth of Internet commerce. Because of the greater potential losses, these states are more likely to support reforms that help maintain their sales and use tax revenue base.
[19] Table 2 presents the sales tax rates for the 50 states, their localities, and the District of Columbia. Also reported in Table 2 is the reliance (as measured by CRS) of the states on the general sales (or gross receipts) tax. Even though gross receipts taxes have more in common with traditional business taxes, the Bureau of the Census combines them with general sales taxes.16 Depending on the state law and the vendor, revenue generated by Internet transactions with out-of-state purchasers may or may not fall under the gross receipts tax.17
[20] Simplifying or standardizing the sales tax begins with implementing uniform base definitions. The second step would require agreement between a state and its local governments on the appropriate rate. Some have suggested a blended rate, such as an average of all local rates added to the state rate, instead of the existing state rate. It is uncertain how state and local governments with different rates will reconcile their different rates.
Internet Taxes: Economic Issues
[21] During the debate about "Internet taxes," some economic issues will be important to consider. Questions such as: How will the treatment of Internet taxes influence the efficiency and equity of state tax systems? What will be the impact of changes in the treatment of Internet transactions on states that are more reliant on the sales tax? What will the potential revenue loss be absent changes in the treatment of Internet transactions? Following below is a brief review of some of those issues.
[22] Efficiency. A commonly held view among economists is that a "good" tax (or more precisely, an efficient tax) is one that does not significantly distort consumer behavior. Broadly speaking, individuals should make the same choices before and after a tax is imposed. The greater the distortions in behavior caused by a tax, the greater the economic welfare loss. A sales tax levied on all consumer expenditures equally would satisfy this definition of efficiency. However, as noted earlier, under the current state sales tax system, all consumption expenditures are not treated equally. The growth of tax-free Internet transactions will likely amplify the efficiency losses from altered consumer behavior.
[23] An alternative theory for sales taxation is referred to as "optimal commodity taxation." Under an optimal commodity tax, the tax rate should be based on (or determined by) the price elasticity of demand for the product (sometimes called the "Ramsey Rule"). Conversely, products that are price inelastic, meaning quantity demanded is insensitive to changes in price, should be levied a higher rate of tax. Products that are price elastic, should have a lower rate of tax. If products purchased over the Internet are relatively more price elastic, then the lower tax rate created by effectively tax-free Internet transactions may improve economic efficiency. However, the price elasticity of products available over the Internet is difficult to measure and the efficiency gain, if any, would be small.18
[24] An additional economic inefficiency would arise if vendors incur higher transportation costs to avoid collection of the sales tax. Consumers may pay higher transportation costs instead of financing government expenditures through the sales tax. In the long run, it is conceivable that the higher transportation costs would erode the advantage of evading the sales tax.
[25] For example, consider a consumer who lives in Virginia and wants to buy a set of wood working chisels.19 The local Virginia hardware store sells the set for $50 (including profit). An Internet savvy hardware store in Georgia is willing to sell the same chisel set for $52 inclusive of profit and shipping costs. So, before taxes, the local retailer could offer the chisels at a lower price. The marginal customer, who is indifferent between the two retailers before taxes, is just as likely to buy from the Internet retailer as from the local retailer.20
[26] However, the Virginia state and local sales tax of 4.5% yields a final sales price to the consumer of $52.25. Given the higher relative price inclusive of the tax, the marginal consumer, along with many other consumers, would likely switch to buying chisels from the Internet retailer (assuming these consumers do not feel compelled to pay the required Virginia use tax on the Internet purchase). The diversion from retail to the Internet in response to the non-collection of the use tax represents a loss in economic efficiency. The additional $2 in production costs represents the efficiency loss to society from evading the use tax.21
[27] Equity. The sales tax has often been criticized as a regressive tax, or a tax that disproportionately burdens the poor.22 Assuming Internet shoppers are relatively better off and do not remit use taxes as prescribed by state law, they can avoid paying tax on a larger portion of their consumption expenditures than those without Internet access at home or work.23 Consumers without ready Internet access are not afforded the same opportunity to "evade" the sales and use tax. In this way, electronic commerce may actually exacerbate the regressiveness of the sales tax, at least in the short run. As computers and access to the Internet become more readily available, the potential inequity arising from this aspect of the "digital divide" could diminish.
[28] Sales Tax Reliance. The growth of Internet based commerce will have the greatest effect on the states most reliant on the sales and use tax. In addition to having more revenue at risk, high reliance states also face greater efficiency losses because of their generally higher tax rates.24 As noted earlier, higher rates drive a larger wedge between the retail price inclusive of the sales tax and the Internet price and thus exacerbate the efficiency loss from the sales tax. States with low rates (and in turn less reliance) would tend to have a smaller wedge between the two modes of transaction. High rate-high reliance states would tend to recognize the greatest revenue loss from a ban on the taxation of Internet transactions.
[29] Based upon CRS calculations of sales tax revenue as a portion of total tax revenue, Washington, Florida, and Tennessee are the states most reliant upon the sales and use tax.25 In those states, over 57% of total tax revenue is derived from the sales tax. This result is not surprising: these states do not have a comprehensive personal income tax. In fact, the top six states in terms of sales tax reliance do not levy a broad based personal income tax. Ordinal rankings of sales tax reliance appear in the last column of Table 2. The District of Columbia was given the ranking it would have received if it were a state. The third column (c) of Table 2 reports the highest local sales tax rate for those states that levy local sales taxes. State revenue and reliance rank do not include local sales and use tax revenues.
[30] State Revenue Loss Estimates. Economists Donald Bruce and William Fox estimated in September 2001 that the "new e-commerce" loss in 2001 was going to be approcimately $7 billion.26 "New e-commerce," as measured by Bruce and Fox, is the lost revenue from states not collecting the use tax on remote Internet transactions. This estimate excludes purchases made over the telephone or through catalogs that would have occurred anyway. An earlier General Accounting Office (GAO) report estimated that the revenue loss in 2003 from internet sales would be between $10 billion and $12.4 million.27 The wide range of the GAO estimate reflects the degree of uncertainty on the size of the potential state and local revenue loss from e-commerce.
Policy Options
[31] Congress can play a passive or active role in the Internet tax debate. A passive approach would allow the newly extended moratorium to expire on November 1, 2003 without any additional legislation that directly affects Internet taxes. Some may also consider congressional inaction on the use tax collection issue as part of a passive agenda. An active role would likely involve new limits on the ability of state and local governments to levy taxes on Internet access and on transactions conducted over the Internet. The course of congressional action (or inaction) will likely occur before the moratorium extension expires in November 2003. This section explores some possible outcomes and consequences of the two alternatives.
[32] Passive Approach. This approach, allowing the moratorium to expire and inaction on the use tax collection issue, would implicitly maintain the current limitations on the states' ability to require remote vendors to collect sales and use taxes. Some observers believe that this course of in action would ultimately lead states to abandon the sales tax because untaxed Internet transactions would, over time, significantly erode the revenue base. Even though some base erosion is likely, the ultimate size of the potential revenue loss is highly speculative. Nevertheless, revenue uncertainty is unwelcome to state officials who must balance their operating budgets annually. Uncertain revenue streams are particularly troubling for state budget officials because, unlike the federal government, states face state constitutional (or legislated) restrictions on the use of debt and on the total amount of debt outstanding. Thus funding temporary shortfalls with borrowing is more difficult for state and local governments than for the federal government.
[33] Advocates of the passive approach suggest that a lower tax burden on Internet transactions would help small Internet retailers compete with larger, established retail entities. While a relatively lower tax burden would clearly help Internet vendors in the short run, direct payments to Internet vendors would seem to be a more transparent means of delivering a subsidy.
[34] Opponents of congressional passivity on the sales and use tax collection issue focus on the negative impact state revenue losses may have on the states if Congress does nothing. In addition, some critics of a passive approach believe that anticipated congressional action provides the impetus for state and local governments to simplify their sales tax systems.
[35] Active Approach. The active options available to Congress range from (a) forbidding sub-federal governments from levying taxes on both Internet access and on transactions conducted over the Internet, regardless of nexus issues to, (b) requiring remote vendors (those without nexus) to collect and remit use taxes. The first option (a) is unlikely without an accompanying concession by the federal government to compensate for the federal mandate. The second option (b) is unlikely without action by the states and local governments to simplify and harmonize their tax regimes.28
[36] Both extremes in the active approach have their supporters. However, proponents closely aligned with the first option, essentially creating an Internet tax-free zone, seem driven more by reducing taxes generally than by other policy concerns. Supporters closer to the other activist option are concerned about state revenue losses as well as the apparent need to reform state and local taxes. These activists believe the Internet tax debate provides a unique opportunity to simplify and reform state and local sales taxes.
Table 1. State General Sales and Gross Receipts Taxes as
Percent of Total Personal Income, by State, FY2000
(Local sales and use taxes not included)
_____________________________________________________________________
State GSGR /a/
(italics =no personal State Tax Groceries in
income tax) Revenue 2000 State Base
(/*/=no state sales tax) ($000's) (in 2001)
(a) (b) (c)
_____________________________________________________________________
Alabama 1,701,885 Y
Alaska /*/ n/a n/a
Arizona 3,632,686 N
Arkansas 1,706,645 Y
California 23,457,385 N
Colorado 1,849,305 N
Connecticut 3,419,939 N
Delaware /*/ n/a n/a
District of Columbia /b/ 640,212 N /c/
Florida 15,010,888 N
Georgia 4,630,179 N
Hawaii 1,536,276 Y
Idaho 747,134 Y
Illinois 6,393,080 Y /d/
Indiana 3,579,416 N
Iowa 1,722,836 N
Kansas 1,743,835 Y
Kentucky 2,171,609 N
Louisiana 2,060,822 Y /e/
Maine 847,358 N /c/
Maryland 2,498,184 N
Massachusetts 3,565,267 N
Michigan 7,666,399 N
Minnesota 3,723,638 N
Mississippi 2,333,384 Y
Missouri 2,787,531 Y /d/
Montana n/a n/a
Nebraska 1,027,940 N
Nevada 1,941,674 N
New Hampshire /f/ /*/ n/a n/a
New Jersey 5,508,046 N
New Mexico 1,502,319 Y
New York 8,563,323 N
North Carolina 3,361,189 N
North Dakota 330,269 N
Ohio 6,263,251 N
Oklahoma 1,441,670 Y
Oregon /*/ n/a n/a
Pennsylvania 7,057,309 N
Rhode Island 621,066 N
South Carolina 2,458,308 Y /d/
South Dakota 487,897 Y
Tennessee /f/ 4,446,160 Y
Texas 14,012,165 N
Utah 1,423,234 Y
Vermont 215,423 N
Virginia 2,471,938 Y /d/
Washington 7,739,014 N
West Virginia 917,050 Y
Wisconsin 3,506,696 N
Wyoming 368,779 Y /g/
_____________________________________________________________________
[table continued]
_____________________________________________________________________
State Personal GSGR Tax as Percent
Income 2000 of Personal Income
($000's) 2000
(d) (e)
_____________________________________________________________________
104,567,520 1.63%
18,611,908 0.00%
129,132,715 2.81%
58,844,351 2.90%
1,094,769,896 2.14%
140,352,701 1.32%
139,304,914 2.46%
24,441,118 0.00%
21,918,759 2.92%
447,011,972 3.36%
228,692,342 2.02%
33,775,622 4.55%
30,758,920 2.43%
396,238,894 1.61%
163,549,354 2.19%
77,283,220 2.23%
73,829,202 2.36%
97,444,879 2.23%
103,111,837 2.00%
32,411,818 2.61%
178,506,406 1.40%
239,738,503 1.49%
289,389,592 2.65%
157,429,716 2.37%
59,467,235 3.92%
152,436,677 1.83%
20,394,576 0.00%
47,422,716 2.17%
59,639,529 3.26%
40,937,513 0.00%
312,890,502 1.76%
39,972,781 3.76%
655,582,965 1.31%
217,011,152 1.55%
15,915,510 2.08%
317,266,457 1.97%
81,553,670 1.77%
94,999,226 0.00%
362,989,426 1.94%
30,599,459 2.03%
96,411,001 2.55%
19,659,014 2.48%
147,751,975 3.01%
580,735,638 2.41%
52,473,687 2.71%
16,410,675 1.31%
220,583,134 1.12%
184,280,313 4.20%
39,369,502 2.33%
150,866,372 2.32%
13,575,136 2.72%
_____________________________________________________________________
Sources: Columns (b) and (d), U.S. Bureau of Census; column (c), Federation of Tax Administrators; column (e), author's calculations.
FOOTNOTES TABLE 1
/a/ General sales and gross receipts tax (GSGR).
/b/ General sales and gross receipts data are from the annual report of the District of Columbia municipal government which is not directly comparable to the other states.
/c/ Snack food is not exempt.
/d/ Subject to a reduced rate.
/e/ Exemption is temporarily suspended.
/f/ Only capital income included in the personal income tax.
/g/ Some snack foods are taxable.
END OF FOOTNOTES TABLE 1
_____________________________________________________________________
State State Rate Highest Local Total State
(/*/=no local tax in 2001 Rate in 2001 Tax Revenue
in FY2000
($000's
(a) (b) (c) (d)
_____________________________________________________________________
Alabama 4 5 6,438,438
Alaska n/a 6 1,423,287
Arizona 5.6 3 8,100,737
Arkansas 5.125 3 4,870,561
California 6 2.75 83,807,959
Colorado 2.9 4.5 7,075,047
Connecticut /*/ 6 0 10,171,242
Delaware /*/ n/a n/a 2,132,131
District of Columbia /b/ 5.75 n/a 3,029,303
Florida 6 2.5 24,817,263
Georgia 4 3 13,511,275
Hawaii /*/ 4 n/a 3,334,743
Idaho 5 2 2,377,251
Illinois 6.25 2.5 22,788,799
Indiana /*/ 5 0 10,104,353
Iowa 5 2 5,185,394
Kansas 4.9 3 4,865,305
Kentucky /*/ 6 0 7,694,610
Louisiana 4 5.5 6,512,382
Maine /*/ 5 0 2,661,080
Maryland /*/ 5 0 10,354,447
Massachusetts /*/ 5 0 16,152,874
Michigan /*/ 6 0 22,756,403
Minnesota 6.5 1 13,338,532
Mississippi /*/ 7 0 4,711,594
Missouri 4.225 4 8,571,548
Montana /*/ n/a n/a 1,410,760
Nebraska 5 1.5 2,981,047
Nevada 6.5 0.75 3,717,255
New Hampshire /*/ n/a n/a 1,696,085
New Jersey /*/ 6 0 18,147,604
New Mexico 5 2.1875 3,743,178
New York 4 4.5000 41,735,841
North Carolina 4 2 15,216,066
North Dakota 5 2 1,172,373
Ohio 5 2 19,676,365
Oklahoma 4.5 5.25 5,851,814
Oregon /*/ n/a n/a 5,945,675
Pennsylvania 6 1 22,466,906
Rhode Island /*/ 7 0 2,034,909
South Carolina 5 1 6,381,391
South Dakota 4 2 927,245
Tennessee 6 2.75 7,739,590
Texas 6.25 2 27,424,142
Utah 4.75 2 3,978,697
Vermont /*/ 5 0 1,470,828
Virginia 3.5 1 12,648,071
Washington 6.5 2.3 12,567,383
West Virginia /*/ 6 0 3,343,266
Wisconsin 5 0.6 12,643,015
Wyoming 4 2 963,650
_____________________________________________________________________
[table continued]
_____________________________________________________________________
GSGR /a/ State Tax GSGR Tax as
Revenue in FY2000 Percent of FY2000
($000's) Tax Revenue Reliance Rank
(e) (f) (g)
_____________________________________________________________________
1,701,885 26.4% 37
0 0.0% 51
3,632,686 44.8% 9
1,706,645 35.0% 16
23,457,385 28.0% 33
1,849,305 26.1% 38
3,419,939 33.6% 20
0 0.0% 51
640,212 21.1% 44 /b/
15,010,888 60.5% 2
4,630,179 34.3% 18
1,536,276 46.1% 8
747,134 31.4% 26
6,393,080 28.1% 32
3,579,416 35.4% 15
1,722,836 33.2% 21
1,743,835 35.8% 13
2,171,609 28.2% 30
2,060,822 31.6% 25
847,358 31.8% 23
2,498,184 24.1% 40
3,565,267 22.1% 42
7,666,399 33.7% 19
3,723,638 27.9% 34
2,333,384 49.5% 7
2,787,531 32.5% 22
0 0.0% 51
1,027,940 34.5% 17
1,941,674 52.2% 5
0 0.0% 51
5,508,046 30.4% 29
1,502,319 40.1% 10
8,563,323 20.5% 43
3,361,189 22.1% 41
330,269 28.2% 31
6,263,251 31.8% 24
1,441,670 24.6% 39
0 0.0% 51
7,057,309 31.4% 27
621,066 30.5% 28
2,458,308 38.5% 11
487,897 52.6% 4
4,446,160 57.4% 3
14,012,165 51.1% 6
1,423,234 35.8% 14
215,423 14.6% 46
2,471,938 19.5% 45
7,739,014 61.6% 1
917,050 27.4% 36
3,506,696 27.7% 35
368,779 38.3% 12
_____________________________________________________________________
Sources: Columns (b) and (c): Federation of Tax Administrators. Columns (d) and (e): Bureau of Economic Analysis. Column (f) and (g): author's calculations.
FOOTNOTES TABLE 2
/*/= State has no local tax.
/a/ General sales and gross receipts tax (GSGR).
/b/ General sales and gross receipts data are from the annual report of the District of Columbia municipal government which is not directly comparable to the other states.
/c/ In 1999, 97 of 162 municipalities in Alaska levied sale taxes and 7% was the highest rate of those 97.
END OF FOOTNOTES TABLE 2
FOOTNOTES
1U.S. Bureau of the Census, "Summary of State and Local Government Tax Revenue," http://www.census.gov/govs/qtax/table2.txt, visited Nov. 27, 2001.
2U.S. Bureau of the Census, "United States State and Local Government Finances by Level of Government: 1998-99," http://www.census.gov/govs/estimate/9900us.html, visited Jan. 8, 2002.
3U.S. Constitution, art. 1, sec. 8.
4In Mississippi, a use tax, the companion to the sales tax, was added in 1938. A use tax is a tax on the use of a product. In the early years of the sales tax, states began with general sales then added the use tax. Eventually, states adopting a sales tax included the use tax in the enacting legislation.
5Fox, William F., ed., Sales Taxation: Critical Issues in Policy and Administration, Sales Tax Trends and Issues, by Ebel, Robert and Christopher Zimmerman (Westport, CT: Praeger, 1992), pp. 3-26.
6The highest rate in 1934 was 3%, which was considered quite high at the time. Today, in some Oklahoma jurisdictions, the rate can be as high as 9.75%.
7The five states without a state sales tax are: Alaska, Delaware, Montana, New Hampshire, and Oregon.
8For a review of the recently passed moratorium extension, H.R. 1552 (P.L. 107-75), and other Internet related legislation introduced in the 107th Congress, see: U.S. Library of Congress, Congressional Research Service, Internet Tax Bills in the 107th Congress: A Brief Comparison, by Nonna Noto, CRS Report RL31158.
9For more information on federal Internet access fees and charges, see: U.S. Library of Congress, Congressional Research Service, Internet Service and Access Charges, by Angele Gilroy, CRS Report RS20579.
10A gross receipts tax, such as New Mexico's, is a business tax that is levied on all of the revenues generated by a business operating in the state. The grand-fathering provision in the Internet Tax Freedom Act, allowed states with Internet access taxes in place to keep them. The current list of states with Internet access taxes: Hawaii, New Mexico, North Dakota, Ohio, South Dakota, Tennessee, Texas, Washington, and Wisconsin.
11P.L. 105-277, Title XI.
12Tax evasion is illegal, whereas tax avoidance, where individuals change their behavior to reduce their tax burden, is legal. For example, moving to a state with no personal income tax, such as Florida, Maine, or Texas, is legal state income tax avoidance. A Florida resident not paying the Florida use tax on an out-of-state purchase is tax evasion.
13For example, only two states tax medical services, Hawaii and New Mexico.
14A common identity in the economics of income accounting is the following: C=Y-S. Or, consumption (C) equals income (Y) less saving (S).
15For example, see: Susanne Pagano, "DOR Working to Educate Purchasers About Taxes Due on Remote Purchases," Daily Tax Report, Dec. 5, 2001, p. H-4.
16The Bureau of the Census also collects data on excise taxes and selective sales. We do not report these receipts because they are typically collected at the wholesale level, not at the point of retail transaction. For example, the gasoline excise tax is typically paid by the carrier (tanker truck) at the point of collection (the end of the pipeline), not retail sale.
17Under a gross receipts tax (GRT), a vendor remits a designated percentage (e.g., 5% in New Mexico) of monthly gross receipts (or sales revenue) to the state. A gross receipts tax is different from the sales tax because the vendor is legally responsible for paying the tax, not the purchaser. Under the sales tax, the vendor acts as the collection agent for the taxing jurisdiction and is not technically "paying" the tax; the buyer is paying the tax.
18Equity has both horizontal and vertical components. A tax is defined as horizontally equitable if people of equal circumstances pay equal taxes. A tax is defined as vertically equitable if people with a greater ability to pay carry a greater tax burden than those less able to pay. An optimal commodity tax would likely violate accepted principles of vertical equity.
19This example is based on one provided in: Dennis Zimmerman, "The Internet Sales Tax Debate: Sorting Through the Economic Issues," paper prepared for the 94th Annual Conference, National Tax Association, Baltimore, MD, Nov. 8-10, 2001.
20The pre-tax price relationship between the two retailers is unimportant. The Internet price inclusive of shipping could be lower before taxes. The application of the use tax makes the local retailer's product relatively more expensive, regardless of what the prices were before taxes.
21Shipping costs can be thought of as a cost of production. The local retailer probably also paid shipping costs to have the product on the shelf. Those costs are included in the price of the good. Because the local retailer likely bought in bulk, the shipping cost per unit would be considerably lower than the Internet retailer.
22A regressive tax collects a smaller percentage of income as income increases. Economists will usually avoid normative question of what is equitable because such a statement implies an interpersonal comparison of utility.
23Goolsbee and Zittrain (1999) found that the average Internet user had on average two more years of education and $22,000 more in family income than non-Internet users.
24The top 10 states in the CRS calculated reliance index have an average state sales tax rate of 5.685%, and the bottom 10 states with a sales tax have an average sales tax rate of 4.365%.
25In addition, those three states were well above the average state tax rate in the U.S. of just over 5.1% (of the 45 states with a state sales tax and the District of Columbia). The state tax rates for those three states were: Washington, 6.5%; Florida, 6%; and Tennessee, 6%.
26Donald Bruce and William F. Fox, "State and Local Sales Tax Revenue Losses from E-Commerce: Updated Estimates," University of Tennessee Center for Business and Economic Research, Sept. 2001, p. 1.
27U. S. General Accounting Office, Sales Taxes: Electronic Commerce Growth Presents Challenges; Revenue Losses Are Uncertain, GAO Report OCE-00-165 (Washington: June 30, 2000), p. 21.
28For a detailed review of the arguments surrounding the push for simplification, see: Charles McLure Jr., "SSTP: Out of Great Swamp, But Whither? A Plea to Rationalize the State Sales Tax," State Tax Notes, December 31, 2001, p. 1077.
END OF FOOTNOTES
- AuthorsMaguire, Steven
- Institutional AuthorsCongressional Research Service
- Subject Area/Tax Topics
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 2002-2344 (16 original pages)
- Tax Analysts Electronic Citation2002 TNT 20-15