GAO Assesses Tax Free Internet Sales on State/Local Governments

Posted on by Chief Marketer Staff

A General Accounting Office report issued Monday estimated that tax-free Internet sales will cause state and local governments to lose between $300 million and $3.8 billion in tax revenue.

Roscoe P. Starek III, the Direct Marketing Association’s senior vice president, catalog issues, immediately branded the report’s estimate of state and local revenue loss “an exaggeration of the kinds of revenue that actually are being lost” because of Internet sales.

He noted that several recent studies put the figure much lower. One of those studies, conducted several months ago by the New York-based accounting firm of Ernst & Young, estimated that the loss in 1998 was “less than $170 million” with slight increases over the next several years. However, another done by Goolsbee and Zittrain estimated that the loss for the same period ranged between $210 million to $430 million while predicting that it would balloon to “about $3.5 billion in 2003.”

James R. White, the GAO’s tax policy director, indirectly agreed with Starek that hard and fast numbers are hard to come by in a letter to Senators George V. Voinovich (R-OH) and Bob Graham (D-FL), which accompanied the 70 page report. Voinovich and Graham, who are reviewing the report, had no comment.

“There were few reliable data sources on which to base the calculations,” he wrote to Voinovich and Graham, who as supporters of Internet taxation, requested the study. Absent any hard and fast data, White said auditors for the investigative arm of Congress collected state estimates of sales tax compliance; constructed formulas, an dplugged in both positive and negative scenarios to come up with its estimations on a state-by-state basis.

According to the GAO estimates, Texas stands to lose between $26 million and $342 million this year; California between $23 million and $533 million; and New York between $22 million and $357 million.

At the lower end of the spectrum, the GAO said North Dakota stood to lose between $1 million and $7 million in revenue while Wyoming could lose around $6 million.

Delaware, Montana, New Hampshire and Oregon, which don’t have sales or use taxes, wouldn’t lose a penny.

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