August 1999

ERNST & YOUNG STUDY FINDS TAX REVENUES MINIMALLY IMPACTED BY INTERNET

Ernst & Young's Economic Consulting and Quantitative Analysis Group recently compiled a study that estimates the sales and use taxes that would have been collected on Internet transactions would have amounted to less than $170 million. This figure amounts to one-tenth of one percent of total state and local government sales and use tax collections.

Electronic commerce has raised significant tax policy issues for state and local governments. Many elected officials are
concerned about the erosion of revenue that would have been otherwise collected. Companies are afraid of the administrative logistics of complying with the multitude of different sales and use taxes to which e-commerce is potentially subject.

"This study demonstrates that tax
revenues for state and local governments are being minimally affected by e-commerce," said Thomas Neubig, national director of policy economics at Ernst & Young. He suggests that state and Federal governments should therefore take their time in developing a fair and workable tax system for this new sector.

The magnitude of the effect is due to the tax treatment of the different kinds of transactions labeled e-commerce.

  • An estimated 80% of e-commerce is business­business sales that either are not subject to sales and use taxes or are effectively subject to use payments by in-state business purchasers.
  • An estimated 63% of e-commerce that qualifies as consumer sales is intangible services and generally not subject to state and local taxes.
  • An estimated 60% of taxable sales is believed to be substitutions for purchases that would have been made from other remote sellers, such as mail order, which are generally not subject to state and local taxes.
  • Taxes on an estimated 11% of taxable e-commerce retail sales are in fact paid by either vendors or customers.

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