A Need for Cyber Age Tax Collectors
Internet sales likely to erode state revenues

THE Kentucky Long-Term Policy Research Center recently released a report on the potential revenue losses that exploding Internet sales could portend for the state in the coming years. By the year 2002, an estimated 30 percent of Americans age 14 and older are expected to join the ranks of online shoppers. Already, a survey conducted by the University of Kentucky Survey Research Center for the Kentucky Long-Term Policy Research Center shows that 18 percent of Kentuckians are making purchases online. But national estimates suggest that only four to 16 percent of consumer online sales result in sales and use tax payments.

To explore the potential impact of these trends, "Collecting Taxes in the Cyberage" presents alternative annual forecasts of lost state revenue. In the year 2003, the authors estimate that revenue losses from unpaid sales and use taxes could range from a low of $2.2 million to a high of $46.4 million. Cumulative losses over the six-year period examined (1998-2003) could be as high as $115 million. The author’s projections are based on a range of factors, including the potential volume of electronic sales, the lower rates of Internet use and consumer expenditures found in Kentucky, and likely rates of compliance with tax laws.

These survey results also suggest that many of Kentucky’s online buyers will not likely pay the taxes they owe the state. Nearly half of Kentuckians (44 percent) reported that they were either "somewhat unlikely" or "very unlikely" to pay the taxes due the state. Importantly, however, a significant portion of those surveyed (37 percent) reported that they had never heard of the sales and use tax they were expected to pay on online purchases.

Because sales and use taxes presently comprise roughly 35 percent of Kentucky’s total revenue collections, further erosion of these revenues could compel revisions of Kentucky’s system of taxation. Reckoning with potential losses in revenue to e-commerce is certain to be the "preeminent tax policy issue" before state policy makers over the next decade," writes contributing author Merl M. Hackbart, a University of Kentucky economist and economic advisor to the state. Higher rates of personal spending on services have already stalled growth in revenue generated by the sales tax, making the state increasingly reliant on its income tax.

Data compiled and edited by The Lane Report.
Source: The Kentucky Long-Term Policy Research Center

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