SALES TAXES AND
ELECTRONIC COMMERCE
William F. Fox, Director
Center for Business and Economic Research
The University of Tennessee
June 1999
ROLE OF STATE AND LOCAL
GOVERNMENTS
 Provide the Public Services that
• Enhance Quality of Life
• Are the Backbone of a Productive Economy
W.F. Fox, Center for Business and Economic Research, UT Knoxville, June 1999
SHARE OF SERVICES
S&L
Federal
100
Percent
80
60
40
20
0
K-12 Educ
Higher Ed
W.F. Fox, Center for Business and Economic Research, UT Knoxville, June 1999
Police/Fire
Highways
ROLE OF SALES TAXES IN STATE AND
LOCAL FINANCE
 Imposed in 45 States Plus D.C.
 6,600 Local Governments
W.F. Fox, Center for Business and Economic Research, UT Knoxville, June 1999
SHARE OF TAX REVENUES
Other
19.2%
Property
30.4%
Corp. Income
4.6%
Income
21.3%
Sales
24.5%
W.F. Fox, Center for Business and Economic Research, UT Knoxville, June 1999
IS THE SALES TAX A CONSUMPTION
TAX?
 Intent is to Tax Consumption
 Nonetheless, Sales Tax Base Differs from
Consumption
• Much Consumption is Exempt
– Most services
– Some Goods
• Many Business Purchases are Taxable
W.F. Fox, Center for Business and Economic Research, UT Knoxville, June 1999
SALES TAX BASE DIFFERS WIDELY
(Sales Tax Base as a Share of Personal Income, 1997)
Greater than 50%
40% to 50%
Less than 40%
W.F. Fox, Center for Business and Economic Research, UT Knoxville, June 1999
No sales tax
IS THE SALES TAX A CONSUMPTION
TAX?
 Intent is to Tax Consumption
 Nonetheless, Sales Tax Base Differs from
Consumption
• Much Consumption is Exempt
– Most services
– Some Goods
• Many Business Purchases are Taxable
 Must be Destination Based--Use Tax
W.F. Fox, Center for Business and Economic Research, UT Knoxville, June 1999
TAX BASE HAS NARROWED OVER TIME
(Sales Tax Base as a Percent of Personal Income)
60
50
Percent
40
30
20
10
0
1979
W.F. Fox, Center for Business and Economic Research, UT Knoxville, June 1999
1997
TAX BASE HAS NARROWED OVER TIME
 Services Grow Faster than Goods
W.F. Fox, Center for Business and Economic Research, UT Knoxville, June 1999
PERSONAL CONSUMTPION EXPENDITURES,
1979 and 1998
Total Expenditure
Durable Goods
Autos
Other Durables
Nondurable Goods
Food and Beverage
Other Nondurables
Services
1979
Percent
100
13.4
5.9
2.4
39.1
20.3
18.8
47.4
W.F. Fox, Center for Business and Economic Research, UT Knoxville, June 1999
1998
Percent
100
12.3
4.8
2.4
28.6
14.0
14.6
59.1
TAX BASE HAS NARROWED OVER TIME
 Services Grow Faster than Goods
 Legislated Business Exemptions
W.F. Fox, Center for Business and Economic Research, UT Knoxville, June 1999
TAX BASE HAS NARROWED OVER TIME
 Services Grow Faster than Goods
 Legislated Business Exemptions
 Other Legislated Exemptions
W.F. Fox, Center for Business and Economic Research, UT Knoxville, June 1999
TAX BASE HAS NARROWED OVER TIME
 Services Grow Faster than Goods
 Legislated Business Exemptions
 Other Legislated Exemptions
 Remote Purchases
• Cross Border Shopping
• Mail Order Shopping
• Electronic Commerce
W.F. Fox, Center for Business and Economic Research, UT Knoxville, June 1999
STATE RESPONSE--RAISE RATES
6.0
Median Rate
5.0
4.0
3.0
2.0
1.0
0.0
1970
1980
W.F. Fox, Center for Business and Economic Research, UT Knoxville, June 1999
1990
STATE SALES TAX COLLECTIONS AS
A PERCENT OF GDP
Percent
2
1
0
1972 1977 1982 1987 1992 1993 1994 1995 1996 1997
POTENTIALLY TAXABLE
E-COMMERCE EVENTS
 Tangible Goods and Services Sold over
the Internet
 Digitized Services Sold Over the Internet
 Access to the Internet
W.F. Fox, Center for Business and Economic Research, UT Knoxville, June 1999
GOALS IN DESIGNING TAX
STRUCTURES
 Neutrality
• Tax Functionally Equivalent the Same
• Destination Basis
W.F. Fox, Center for Business and Economic Research, UT Knoxville, June 1999
GOALS IN DESIGNING TAX
STRUCTURES
 Neutrality
• Tax Functionally Equivalent the Same
• Destination Basis
 Equity
• Vertical--Difficult with the Sales Tax
• Horizontal--Broad Tax Base
W.F. Fox, Center for Business and Economic Research, UT Knoxville, June 1999
GOALS IN DESIGNING TAX
STRUCTURES
 Appropriate Revenue Growth Path
W.F. Fox, Center for Business and Economic Research, UT Knoxville, June 1999
GOALS IN DESIGNING TAX
STRUCTURES
 Appropriate Revenue Growth Path
 Ease of Administration and Compliance
• E-Commerce Presents Some Problems
• Simplification by States Should be Required
W.F. Fox, Center for Business and Economic Research, UT Knoxville, June 1999
GOALS IN DESIGNING TAX
STRUCTURES
 Neutrality
 Equity
 Revenue Growth
 Administrative and Compliance Ease
W.F. Fox, Center for Business and Economic Research, UT Knoxville, June 1999
SOME OPTIONS TO TAXING REMOTE
COMMERCE
 Reduce State and Local Spending Growth
 Raise Sales Tax Rates
 More Federal Finance of State and Local
Government
W.F. Fox, Center for Business and Economic Research, UT Knoxville, June 1999
FEDERAL TRANSFERS AS A PERCENT OF
GENERAL REVENUE
25
Percent
20
15
10
5
0
70
72
74
76
78
80
82
84
W.F. Fox, Center for Business and Economic Research, UT Knoxville, June 1999
86
88
90
92
94
96
SOME OPTIONS TO TAXING REMOTE
COMMERCE
 Reduce State and Local Spending Growth
 Raise Sales Tax Rates
 More Federal Finance of State and Local
Government
 Alternative Own-Source Revenues
• Personal Income Tax
• Business Taxes
• Property Taxes
W.F. Fox, Center for Business and Economic Research, UT Knoxville, June 1999