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CONTACT: David Fish
October 4, 2004
(202) 289-8928
Opt-Out of Internet Tax Effort Helps States
Remote Sales and Benefits Would Shift to Tax Free Zones

WASHINGTON D.C. - The days of tax-free Internet shopping may be numbered - at least if state officials promoting the Streamlined Sales Tax Project (SSTP) get their way. They hope their multi-state compact to harmonize elements of state taxation will be enough to convince the federal government that requiring interstate tax collection is not an 'undue burden' on interstate commerce - and thus illegal and unconstitutional. But, convincing enough states to sign on may be a challenge, given a new study that shows states that opt-out would experience "substantial" benefits.

In "Taxation of Online Sales: Competing With the Streamlined Sales Tax Project," a study released today by The Progress & Freedom Foundation, economists Thomas M. Lenard and Stephen McGonegal find that not all states would benefit from the Streamlined Sales and use Tax Agreement (SSUTA).

"At least some states would not find it in their interest to participate in SSUTA... " conclude Lenard and McGonegal. "States that choose not to join may enjoy a potentially significant competitive advantage... in attracting Internet and other remote retailers because they will be able to sell tax free. The new business attracted through a favorable tax policy will stimulate economic activity, job growth, incomes and tax revenues in the non-SSUTA states." The results of the study suggest that "the potential beneficial effects of 'opting out' are substantial." Among the findings:

  • 11 percent of remote sales ($123 billion of $1.15 trillion, based on 2001 data) would be affected by SSUTA adoption. Other sales are exempt or already taxed.
  • If participation in the SSTP is voluntary, 24 percent of the $123 billion in potentially affected sales ($29 billion) will shift to tax-free states ( Alaska , Delaware , Montana , New Hampshire and Oregon ) as well as other states that choose not to adopt SSUTA.
  • Non-participating states would benefit from an increase of $80 billion in sales, $25 billion in earnings and more than 500,000 jobs, due to multiplier effects.
  • If Virginia opted out of SSTP, it would avoid losing $2.4 billion in sales by Virginia businesses, $1.9 billion in personal income and 14,888 jobs due to loss of remote sales by Virginia businesses. It would also gain a portion of the sales shifted from SSTP participants, which could add up to even greater stimulus to economic activity.

Lenard, who is senior fellow and vice president for research at The Progress & Freedom Foundation, unveiled the taxation study during a presentation Monday morning to the Virginia General Assembly's Joint Subcommittee to Study the Impact of Collecting Sales Taxes on the Economy.

The Progress & Freedom Foundation is a market-oriented think tank that studies the digital revolution and its implications for public policy. It is a 501(c)(3) research & educational organization.



The Progress & Freedom Foundation