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The Truth About Online Sales Taxes: New Analysis Based on Department of Commerce Data Demonstrates Previous Studies Are Unreliable as the Basis for Congressional Action
WASHINGTON, DC, March 13, 2003 – The Direct Marketing Association (The DMA) in conjunction with online, offline and catalog companies today announced the release of a groundbreaking new analysis, based on U.S. Department of Commerce data, demonstrating that previous proclamations about the amount of potential state tax losses due to online sales were, at best, wildly overstated.
The analysis released today, entitled "A Current Calculation of Uncollected State Sales Tax Arising from Internet Growth," clearly shows that potential uncollected revenue to the states is about 85 percent less than compared to prior studies. For example, in 2001, the states reported that approximately $13 billion went uncollected due to their inability to force out-of-state retailers to act as their unpaid tax collectors. In fact, the total amount potentially uncollected was about $1.9 billion.
Much-cited studies from the University of Tennessee erroneously relied on data from the Internet boom years and made flawed assumptions about e-commerce that resulted in their vast over-estimates. Among these were:
All of these factors resulted in excessively high estimates of how much the states were losing financially from Internet sales. These grossly inflated numbers, in turn, have been used to manufacture a political crisis aimed to persuade Congressional lawmakers to overturn 227 years of Interstate Commerce Clause tradition and law.
"It is imperative that if Congress considers overturning the long and successful history of the Interstate Commerce Clause, thereby inflicting harm on American consumers and businesses, it do so based on facts derived directly from an institution like the U.S. Department of Commerce," said H. Robert Wientzen, president & CEO, The DMA.
"The analysis of Internet economic activity in America that we released today demonstrates without a doubt that there is – despite what a lot of state politicians are claiming – no pot of gold for the states in creating new burdens for remote retailers," Wientzen said.
"While the issue of state budget deficits is real, federal policymakers should not be misled into thinking that the states’ fiscal crisis was caused by uncollected remote sales tax," Wientzen said, pointing out that, "in fact, the last time the states came knocking on Congress’ door asking for the power to force out-of-state businesses to collect states’ sales taxes, most of them were running record surpluses.".
"Furthermore, the so-called simplification proposal that the states have been trying to pass – in the hopes of winning Congressional support – is anything but simple," Wientzen said.
In addition, the states have had since 1967 to reduce the cumbersome number of taxing jurisdictions standing in the way of their expressed desire to force out-of-state merchants to collect and remit state sales taxes on their behalf. However, since that time, the number of taxing jurisdictions has ballooned from 2,300 to 7,600.
"If the past is indeed prologue here, there is no reason to believe that the states can achieve meaningful simplification, and there is very real reason to believe that – in their desire to jump on the Internet sales tax bandwagon – the number of taxing jurisdictions in the United States will continue to proliferate," Wientzen commented.
It is important to note that the current system gives the states all necessary authority to collect sales and use taxes from their own citizens without an act of Congress. What the states now are seeking in Congress will lead to burdensome costs and administrative complications that, ultimately, will be shouldered by consumers at a time when the economy can least afford them.
"Some estimates suggest that the yet-to-be-developed software for almost every business in American to manage its cumbersome obligations to 7,600 taxing jurisdictions could cost $25,000 per license and $60,000 for set up. Moreover, most businesses would have to create departments and hire staff in order to comply with all of the states tax codes and rules. The states are simply asking for too much from businesses who are trying to weather today's economic doldrums," said Wientzen.
Recent announcements about nationwide retailers voluntarily agreeing to collect and remit states’sales taxes is simply a practical business decision on their parts. In exchange for voluntarily collecting these taxes -- something they may have been legally obligated to do anyway – they achieved two important goals: 1) amnesty for any past taxes owed, and 2) integration of their online and offline businesses.
Highlights from Today's Analysis:
"In their determination of what they might gain from the Internet, it is incumbent on state policymakers and their Congressional representatives not to be influenced by specious claims concerning the Internet and e-commerce growth," said Peter A. Johnson, Ph.D., senior economist, The DMA, the author of today’s study.
The DMA is the leading trade association for businesses interested in interactive and database marketing, with nearly 4,700 member companies from the United States and 53 other nations. Founded in 1917, its members include direct marketers from every business segment as well as the nonprofit and electronic marketing sectors. Included are catalogers, Internet retailers and service providers, financial services providers, book and magazine publishers, book and music clubs, retail stores, industrial manufacturers and a host of other vertical segments, including the service industries that support them. According to a DMA-commissioned study, direct and interactive marketing sales in the United States are projected to have surpassed $2 trillion in 2002, including $126 billion in catalog sales and $34 billion in sales generated by the Internet. The DMA's Web site iswww.the-dma.org, and its consumer Web site is www.shopthenet.org.
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The analysis released today, entitled "A Current Calculation of Uncollected State Sales Tax Arising from Internet Growth," will be available at today's press conference at The National Press Club at 9:30 AM EST. It will also be available online at the conclusion of the press conference at http://www.the-dma.org/taxation/