Online Sales Tax? No Big Deal

By Beth Cox | Posted February 06, 2003
What if they imposed a sales tax on online purchases, and nothing happened?

A new study on the impact of sales taxes on e-commerce says that's exactly what's going to happen — nothing.

Imposition of a sales tax on e-commerce transactions is indeed likely within three to five years, says the report from New York City-based research and consulting firm Jupiter Research, but "this will not be a significant impediment to the growth of the online retail channel."

For years online retailers have been moaning, groaning and gnashing their teeth, contending that e-commerce is so special and such a fragile form of business that it deserves some breaks to help it succeed and that a tax-free environment is crucial.

But the new report, entitled Sales Tax: Avoidance Is Imperative to Few Online Retailers and Ultimately Futile for All and based on a November 2002 consumer survey, says that most online shoppers are either unaware of the fact that sales tax can be avoided by searching across multiple online retailers or do not see it as cause to choose one retailer over another.

"With budget deficits on the horizon, state and local governments have stepped up their efforts to collect sales tax from online retailers," said Jupiter Research Senior Analyst Ken Cassar. "The collection of taxes is no longer an if but a when."

"Fortunately for online retailers, only a minority of their customers are aware of the fact that they can avoid sales tax by shopping around," he said. "Among those that are aware of the fact that sales tax can be avoided, only nine percent actually make merchant selection decisions based upon whether or not that retailer charges sales tax. The benefits of multi-channel integration overwhelmingly outweigh the importance of sales tax avoidance."

As overall e-commerce sales have grown to become a bigger piece of the retail pie, state governments across the country increasingly have begun paying attention to the lost sales tax revenue. Last November delegates from 33 states met to consider a uniform sales tax aimed at Internet and catalog sales.

Spearheaded by the National Governors Association (NGA), the Streamlined Sales Tax Project (SSTP) would require participating states to have only one tax rate for personal property or services effective by the end of 2005. Included in those services would be online sales.

The Internet Tax Freedom Act only prohibits states from taxing consumers on the use of Internet service providers. The current moratorium does not apply to sales taxes, nor to federal taxes.

The stakes are high indeed. A report by the University of Tennessee last year estimated that all 50 states could collectively lose more than $45 billion in Internet sales tax revenue in 2006.

The Jupiter Research survey found that only 46 percent of consumers were aware of the fact that they could avoid sales tax by comparison shopping at different retailers' Web sites. Of those aware, 61 percent do not go out of their way to find online retailers that don't charge sales tax. Thirty percent of this group sometimes looks for an online retailer that will not charge sales tax and only 9 percent always looks for a retailer that will not charge sales tax.

Adapted from InternetNews.com. Jupiter Research is a division of Jupiter Media, publisher of InternetNews.com and SmallBusinessComputing.com.

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