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Survey: E-Commerce Isn't Resulting In Lost Taxes

Ernst & Young LLP reported in a study released Monday that an increase in online sales and services had minimal effect on the collection of sales and use taxes in 1998, with the total uncollected taxes on the Internet representing a negligible fraction of total tax revenue.

The study found that uncollected sales and use taxes in 1998 rounded out to a mere $170 million, or one tenth of one percent of the total state and local taxes.

Ernst & Young's conclusions are significant because spiked e-commerce usage has raised policy concerns from both sides. Many state and local officials fear the e-commerce boom will lead to erosion of the state and local retail sales and use tax base, while e-tailers want to avoid the administrative cost of implementing various regional and local tax rate systems.

The news comes as a commission created following the October passage of the Internet Tax Freedom Act is meeting for the first time on Monday. The group was set up to determine the impact electronic commerce is having on the tax revenues of local and state governments.

The act prohibits local and state governments from putting extra taxes on goods and services sold online for three years ending in October 2001, but it doesn't prevent them from collecting sales taxes.

"The Advisory Commission on Electronic Commerce, state and local governments, and Congress have time to carefully deliberate on the appropriate taxation of e-commerce," said Dr. Thomas Neubig, national director of policy economics at Ernst & Young. " There is time to construct a fair, efficient, and administrable tax system for both businesses and state and local governments for the 21st century."

The report delegates the limited e-commerce impact on state and local taxes to various factors, including the estimations that the vast majority of e-commerce activity is nontaxed or in-state business-to-business sales, and that business-to-consumer sales are mostly "intangible services" such as travel or finance services or nontaxable items like groceries and prescriptions.

In many cases, sales tax is not collected on goods sold over the Internet, however a smaller percentage of e-tailer sales do end up with taxes paid by vendors or consumers.

The study, "The Sky is Not Falling: Why State and Local Revenues Were Not Significantly Impacted by the Internet in 1998", is available on E&Y's Web site.