Sales Taxes

Although the states can impose a tax on residents' purchases from out-of-state vendors, they cannot impose an obligation on those vendors to collect the tax unless the vendor has a substantial presence--called a nexus--in the state. For sales without nexus, purchasers are legally required to remit the tax, but purchaser compliance is generally much lower than seller compliance. Therefore, at this time, portions of sales and use taxes can be avoided. In 1999, state and local governments collected $203 billion in general sales tax revenues. On average, general sales taxes account for 33 percent of state and 11 percent of local tax revenues. Little empirical data exist on the key factors needed to calculate the amount of sales and use revenues that state and local governments lose on Internet and other remote sales. GAO constructed scenarios representing different assumptions about the important determinants of the loss. Under all scenarios, the size of tax loss from Internet sales for 2000 is less than two percent of aggregate general sales tax revenues. Under the scenario for 2003, the size of the tax loss from Internet sales ranged from less than one percent to about five percent. The results of GAO's scenarios highlight the importance of developing better data about Internet tax losses. Even with better data, the rapid and fundamental nature of innovations in electronic commerce means that policymaking regarding the tax treatment of Internet sales will be done in an environment of significant uncertainty.

GAO noted that: (1) in-store, Internet, and other remote sales are generally taxed at the same rate by a state or local government; (2) however, compliance rates differ significantly depending on nexus; (3) in-store and remote sellers (including Internet sellers) with a substantial presence, or nexus, with the state are legally required to collect and remit the tax; (4) for sales without nexus, purchasers are themselves legally required to remit the tax, but purchaser compliance is generally much lower than seller compliance; (5) the continued growth of e-commerce is likely to magnify existing compliance problems and, as new types of digital goods and transactions are developed, create new ones, such as identifying the location of a sale; (6) such compliance challenges have led some observers to question the long-term viability of sales and use taxes; (7) states' reliance on general sales taxes--whether measured as a percentage of tax revenues, own-source revenues, or total general revenues--varies considerably across states; (8) little empirical data exist on the key factors needed to calculate the amount of sales and use tax revenues that state and local governments lose on Internet and other remote sales; (9) what information does exist is often of unknown accuracy; (10) GAO constructed scenarios representing different assumptions about the important determinants of the loss; (11) under all of GAO's scenarios, the size of the tax loss from Internet sales for 2000 is less than 2 percent of aggregate general sales tax revenues; (12) under all of GAO's scenarios, the size of the loss from all remote sales is less than 5 percent of aggregate sales tax revenues; (13) the rapid change in the Internet economy makes projections of revenue losses from Internet and total remote sales for future years even more uncertain than they are for 2000; (14) under the scenarios GAO constructed for 2003, the size of the tax loss from Internet sales ranged from less than 1 percent to about 5 percent of projected sales tax revenues; (15) for all remote sales, the corresponding loss ranged from about 1 percent to about 8 percent; (16) the results of GAO's scenarios highlight the importance of developing better data about Internet tax losses and understanding the limits of such data; and (17) some of GAO's scenarios show tax losses that by 2003 could present significant revenue challenges for state and local government officials, while other scenarios produce smaller revenue losses.