The Debate Over
Internet Taxation
And the Implications for
Local Government Revenues
Suzette Barta,
Oklahoma Cooperative Extension Service,
Oklahoma State University
October 2, 2001
Michael Faraday describing
electricity to a politician...
COURTESY OF THE ARCHIVES,
CALIFORNIA INSTITUTE OF TECHNOLOGY.
"Sir, I do not know
what it is good for.
But of one thing I
am quite certain,
some day you will
tax it."
Fascinating Facts
Average annual online expenditure among US adults
who purchase online was $763 in 2000. (Emarketer)
66% of American workers have Internet access on the
job. (Worthlin Worldwide)
58% of U.S. households are now online. (Nielsen/Net Ratings)
There is still a digital divide and income is the #1
driver of Internet usage. (Forrester)
Amazing Growth
(Internet Shopping)

Percentage of US
Population that has
purchased on-line.
–
–
–
–
–
1997
1998
1999
2000
2001
7%
10%
17%
27%
37%
40
35
30
25
20
15
10
5
0
1997 1998 1999 2000 2001
Fascinating Projections
US Online Retail Sales
$Billion
$200.0
$180.0
$160.0
$140.0
$120.0
$100.0
$80.0
$60.0
$40.0 $7.8
$20.0
$0.0
1998
$184 b
$44.9 b
b
1999
2000
2001
2002
2003
Sources: 1998-2000 Estimates by Forrester, http://www.nrf.com
2001 and 2003 Projections by e-Marketer, http://www.emarketer.com
2004 projection by Forrester
2004
Holiday Shopping On-Line
14
12.6
12
10
8
8
Billion$
6
4
4
2
1.5
0
1997
1998
Source: Forrester
1999
2000
Top Five Web
Properties: July 2001
AOL Time Warner
Yahoo!
MSN
Microsoft
Lycos Network
Source: Nielsen//NetRatings
Unique
Audience
(Millions)
64.7
55.8
48.4
26.1
21.8
Reach
%
63%
55%
47%
26%
21%
Most Popular Items
Purchased online
Item
Market Capture
(Adult Online Shoppers)
Books and Magazines
42%
CDs/Movies/Videos
39%
Travel Related
39%
Clothing
29%
Source: Diameter’s@plan Advertising and Deloitte and Touche on shop.org
Average Web Usage:
July/2001
Number of Sessions/month
20
Number of unique sites visited
11
Time spent per month
10:19:06
Time spent per session
31:44
Duration of page viewed
00:51
Active Internet Universe
102 million
Current Internet Universe Estimate
165 million
Source: Nielsen//NetRatings
The Picture is not
perfect for e-tailers
•By November of 2000, dot.coms were
failing at a rate of 1 per day.
•So far this year (2001), 248 dot.coms have
closed for a loss of 87,795 jobs. That’s more
than double the jobs lost in 2000.
•Analysts agree: The days of triple digit
growth are over.
•The U.S Government sold more via ecommerce in 2000 than Amazon.com did.
Trouble in Paradise?
Author: Jerry King, Newsfactor.com
Perspective...
Based on U.S. Department of Commerce Data for 2000:
•U.S. Consumer Retail Spending totaled $3.2 trillion
•U.S. Online Retail Spending totaled $25.8 billion.
•Online Spending still only totals about 0.8% of all
retail spending.
Business to Business
E-Commerce
(80-90% of online sales)
$Trillion
2.8
1.9
1.4
0.9
1
1999
2000
0.7
1998
2001
2002
2003
Source: The Boston Consulting Group: http://www.bcg.com/
E-Tax Opinion Survey
Statement
1. It is unfair to make
local retailers collect
sales taxes on goods
when Internet retailers do
not have to.
2. Local retailers are put
at a disadvantage when
competing for sales
against online merchants
who collect no taxes.
% That Agrees
72%
65%
E-Tax Opinion Survey
(Continued)
Statement
1. Support the collection
of sales taxes on goods
acquired through the
Internet.
2. Will not support
higher local taxes to
make up for losses due to
Internet sales.
% That Agrees
60%
85%
Source: National Research, Inc. http://www.naco.org/
Counties report Good
Financial Conditions
On the other hand, in a survey of counties,
84% reported financial conditions that were
“very good” or “excellent”.
 47% expect financial conditions to improve.

Source: County Revenue and Expenditure Patterns, National Association
of Counties and Kansas University.
How many tax dollars do state and
local governments stand to lose due
to e-commerce in the future?
The most commonly cited figure
is $10 billion by 2003.
Share of Loss
Estimated Loss to the State of Oklahoma and
All Local Governments in 2003 is $100 million.
Loss to Counties
3%
Loss to Municip.
37%
Loss to State
Government
60%
State of Oklahoma
Estimated Loss in General
Revenue in 2003
0.51% or $60 million
General Revenue
Lost Revenue
Estimated loss for all OK
Counties in 2003
Loss of 0.88% or $3.2 million
General Revenue for
Counties
Estimated Loss to the
Counties
Considerations and
Concerns
How reliable is the national estimate of a
$10 billion loss by 2003?
 Poorer and more remote counties may be
impacted less due to less Internet
accessibility.
 Sparsely populated counties that are already
subject to outshopping due to lack of retail
will be impacted less.

Outshopping may be the
more important issue
From 1998-99, the average town in
Oklahoma lost about $20,000 in sales tax
collections due to increased out-shopping.
 The average town lost $4,500 due to ecommerce.
 While e-commerce is an issue, out-shopping
may be an even greater one for rural
communities.

Based on a study by Barta and Lansford (2000).
The Internet Tax Freedom
Act - October 1, 1998
•Barred state and local governments from taxing
Internet access from 10-1-98 until 10-21-01.
• Declared that the Internet should be a tariff-free
zone.
• Issued a 3-year moratorium on multiple and
discriminatory taxes on e-commerce.
• Established the Advisory Commission on Electronic
Commerce which was to submit a report to Congress
by 4/21/00.
Discriminatory
Taxation
Any type of taxation
that is imposed on one
kind of retailer, but not
on others.
Ways to discriminate
against internet retailers
Federal Internet Sales Tax
 Allowing sales tax to be
collected from an e-store
by multiple states for a
single transaction
 Internet access taxes

Ways to discriminate against
Brick& Mortar retailers

Allowing Internet retailers
to be exempt from all sales
taxes.
Commission submits its
report on April 12, 2000







Bridging of the digital divide.
Protection of consumer privacy.
A permanent ban on international tariffs on ecommerce.
A simplification of state sales and use tax systems.
Permanent ban on Internet access taxes.
Extension of the Internet tax moratorium on
multiple or discriminatory taxation.
Clarification of nexus standards.
Recent Legislative
Activity

8/2/01: The House Judiciary Subcommittee on
Commercial and Administrative Law passed the
Internet Tax Nondiscrimination Act.
–
–
–

Calls for permanent ban on Internet access taxes and 5year extension on current moratorium.
Makes no mention of a simplification compact among
the states.
Will move to the full Judiciary committee in September.
10/21/01: Current ban on taxation will run out.
If a ban on new internet taxes is
extended…
…what will be the impact
on local government sales
tax collections?
Measuring Impact on Oklahoma
Governments in 2000.

Based on the respected Forrester/NRF
Online Retail Index, B2C online retail sales
totaled $44.9 bil in 2000.

About 1% of those purchases, $449 mil, can
be attributed to Oklahoma.
2000 Impact on Oklahoma
State Sales Tax Collections
100%

90%
80%
70%
Lost State
Collections
60%
50%
Actual State
Collections
40%
30%
20%
10%
0%
STC

At a 4.5% state tax
rate, the state lost
about $20.2 mil in
sales tax collections.
That’s a loss of about
1.5%.
2000 Impact on Oklahoma
County Sales Tax
Collections



At an average county
rate of 0. 4%, 63 out
of 77 county
governments lost
about $1.8 million.
That’s a decrease of
about 1.9%.
14 of 77 counties did
not collect sales tax.
100%
90%
80%
Lost County
Collections
70%
60%
50%
40%
Actual County
Collections
30%
20%
10%
0%
STC
2000 Impact on Oklahoma
Municipal Sales Tax Collections

100%
90%
80%
Lost City
Collections
70%
60%
50%
40%
Actual City
Collections
30%
20%
10%
0%
STC

At an average
municipal sales tax
rate of 2.89%, cities
and towns lost about
$13 mil.
That’s a loss of about
1.5%.
Streamlined Sales
Tax Project
Formed in March of 2000
 38 states are involved

–
–

32 as voting participants
6 as non-voting observers
Objectives:
–
–
–
Simplification of state & local sales & use taxes
Standardization of tax administration across states
Identification of computer software that could be used
to implement the collection of sales tax
SSTP Participants/Observers
Participants
Observers
No Sales Tax
Streamlined Sales
Tax Project

Dec. 2000: SSTP approves:
–
–

National Conference of State Legislatures
(NCSL) also approved a simplification act.
–

Uniform Sales and Use Tax Administrative Act
Streamlined Sales and Use Tax Agreement
NCSL provisions are less comprehensive than
SSTP Act
State legislatures must adopt the act into
law in their own states.
States That Have Signed
SSTP or NCSL Legislation
SSTP Act Enacted
NCSL Act Enacted
Modified Act Enacted
Questions?