March 17, 2003, 12:00 AM

DMA challenges states` estimate of revenue lost to uncollected online taxes

The Direct Marketing Association released a study claiming that states are using vastly inflated estimates of revenue lost to uncollected tax on online sales. State officials counter that the DMA`s figures overlook key metrics.

Paul Demery

Managing Editor, B2B E-commerce

Using federal commerce data, the Direct Marketing Association released a study claiming that states are using vastly inflated estimates of revenue lost to uncollected tax on online sales. The DMA figures that states lost $1.9 billion to uncollected online sales tax last year -- an estimate 85% less than the $13.3 billion cited by the states.


The DMA faults a 2001 study conducted for the states by the University of Tennessee, which projected that state revenue lost to uncollected online sales tax would amount to $13.3 billion in 2001, $45.2 billion in 2006 and $54.8 billion in 2011. The DMA contends that the university`s study relied on overly aggressive growth rates, and on b2b online activity, such as electronic data interchange, that predated the Internet. The DMA also contends that the Tennessee study factored in an excessively low rate of business compliance in sales tax remittance, which would result in an over-estimated amount of lost revenue.


"The analysis of Internet economic activity in America that we released demonstrates without a doubt 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," said H. Robert Wientzen, president and CEO of the DMA, which represents catalogers, e-retailers and other direct merchants.


Diane Hardt, tax administrator for the Wisconsin Department of Revenue and co-chair of the Streamlined Sales Tax Project, admits that some of the figures in the Tennessee study may be too high. She notes that several states have said that the Tennessee study under-estimates the amount of business compliance in remitting sales tax.


Nonetheless, Hardt contends that the DMA`s study is far off with its own estimates. For example, she notes that, according to the DMA study, Wisconsin lost about $38 million in uncollected online sales tax in 2001, but she says her state`s own study figures it lost about $250 million last year. "However you look at it, the numbers of lost revenue are big," she says.


A spokesman for the National Council of State Legislatures says the DMA`s study underestimates the impact of both growing online consumer sales as well as b2b sales. He notes that the DMA study overlooks the fact that a large part of uncollected b2b sales tax stems from small businesses that buy their supplies online.



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