October 8, 2001, 12:00 AM

Sales tax losses worse than expected, researchers say

Sales tax losses this year will be 41% higher than researchers had estimated last year, due to higher than expected b2b e-sales.

Sales tax losses to state and local governments are even more dire than originally thought, say two researchers from The University of Tennessee’s Center for Business and Economic Research. For this year, sales tax losses will be 41% higher than they had estimated last year. The increase is the result of higher than expected b2b sales on the Internet.

In 2001, sales tax losses will equal $13.3 billion. By 2006, that loss will more than triple to $45.2 billion. Researchers Assistant Professor Donald Bruce and Professor William F. Fox report that $6.3 billion would have been lost to remote sales anyway, meaning the loss that governments otherwise would have collected is $7 billion.

Bruce and Fox report that the $7 billion in new e-commerce sales tax losses in 2001 equal 1.09% of all sales taxes for states that charge sales tax. The total e-commerce losses of $13.3 billion represent 2.06%, while the loss from all remote sales is 2.55%. “While magnitude is in the eye of the beholder, these strike us as quantitatively large shares,” they say.

The figures are based on projected Internet b2c and b2b sales from Forrester Research Inc. In calculating the sales tax losses, Bruce and Fox deducted sales that would not have generated sales tax, such as digital downloads of books or music, and have not counted online purchasing that Forrester reports but that either is not consummated online, such as hotel reservations, or does not have a sales tax associated with it, such as airline and event tickets. Furthermore, in calculating losses, the researchers took into account that certain purchases do not incur sales taxes in some states and do in others.

The entire report is available at http://cber.bus.utk.edu/ecomm.htm.

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