The Debate Over Internet Taxation And the Implications for Local Government Revenues Suzette Barta, Oklahoma Cooperative Extension Service, Oklahoma State University October 2, 2001

Michael Faraday describing electricity to a politician... "Sir, I do not know what it is good for. But of one thing I am quite certain, some day you will tax it." COURTESY OF THE ARCHIVES, CALIFORNIA INSTITUTE OF TECHNOLOGY.

Fascinating Facts Average annual online expenditure among US adults who purchase online was $763 in 2000. (Emarketer) 66% of American workers have Internet access on the job. (Worthlin Worldwide) 58% of U.S. households are now online. (Nielsen/Net Ratings) There is still a digital divide and income is the #1 driver of Internet usage. (Forrester)

Amazing Growth (Internet Shopping) Percentage of US Population that has purchased on-line. 1997 7% 1998 10% 1999 17% 2000 27% 2001 37%

Fascinating Projections US Online Retail Sales $Billion $184 b $44.9 b $7.8 b Sources: 1998-2000 Estimates by Forrester, http://www.nrf.com 2001 and 2003 Projections by e-Marketer, http://www.emarketer.com 2004 projection by Forrester

Holiday Shopping On-Line Source: Forrester

Top Five Web Properties: July 2001 Source: Nielsen//NetRatings

Most Popular Items Purchased online Market Capture (Adult Online Shoppers) Books and Magazines 42% CDs/Movies/Videos 39% Travel Related Clothing 29% Source: Diameter’s@plan Advertising and Deloitte and Touche on shop.org

Average Web Usage: July/2001 Number of Sessions/month 20 Number of unique sites visited 11 Time spent per month 10:19:06 Time spent per session 31:44 Duration of page viewed 00:51 Active Internet Universe 102 million Current Internet Universe Estimate 165 million Source: Nielsen//NetRatings

The Picture is not perfect for e-tailers By November of 2000, dot.coms were failing at a rate of 1 per day. •So far this year (2001), 248 dot.coms have closed for a loss of 87,795 jobs. That’s more than double the jobs lost in 2000. Analysts agree: The days of triple digit growth are over. •The U.S Government sold more via e-commerce in 2000 than Amazon.com did. E-commerce firms are turning to the “old-fashioned” merchants for partnerships.

Trouble in Paradise? Author: Jerry King, Newsfactor.com

Perspective... Based on U.S. Department of Commerce Data for 2000: U.S. Consumer Retail Spending totaled $3.2 trillion U.S. Online Retail Spending totaled $25.8 billion. Online Spending still only totals about 0.8% of all retail spending.

Business to Business E-Commerce (80-90% of online sales) $Trillion Source: The Boston Consulting Group: http://www.bcg.com/

E-Tax Opinion Survey

E-Tax Opinion Survey (Continued) Source: National Research, Inc. http://www.naco.org/

Counties report Good Financial Conditions On the other hand, in a survey of counties, 84% reported financial conditions that were “very good” or “excellent”. 47% expect financial conditions to improve. Source: County Revenue and Expenditure Patterns, National Association of Counties and Kansas University.

The most commonly cited figure is $10 billion by 2003. How many tax dollars do state and local governments stand to lose due to e-commerce in the future? The most commonly cited figure is $10 billion by 2003.

Share of Loss Estimated Loss to the State of Oklahoma and All Local Governments in 2003 is $100 million.

State of Oklahoma Estimated Loss in General Revenue in 2003 0.51% or $60 million

Estimated loss for all OK Counties in 2003 Loss of 0.88% or $3.2 million

Considerations and Concerns How reliable is the national estimate of a $10 billion loss by 2003? Poorer and more remote counties may be impacted less due to less Internet accessibility. Sparsely populated counties that are already subject to outshopping due to lack of retail will be impacted less.

Outshopping may be the more important issue From 1998-99, the average town in Oklahoma lost about $20,000 in sales tax collections due to increased out-shopping. The average town lost $4,500 due to e-commerce. While e-commerce is an issue, out-shopping may be an even greater one for rural communities. Based on a study by Barta and Lansford (2000).

The Internet Tax Freedom Act - October 1, 1998 •Barred state and local governments from taxing Internet access from 10-1-98 until 10-21-01. • Declared that the Internet should be a tariff-free zone. • Issued a 3-year moratorium on multiple and discriminatory taxes on e-commerce. • Established the Advisory Commission on Electronic Commerce which was to submit a report to Congress by 4/21/00.

Discriminatory Taxation Any type of taxation that is imposed on one kind of retailer, but not on others.

Ways to discriminate against internet retailers Federal Internet Sales Tax Allowing sales tax to be collected from an e-store by multiple states for a single transaction Internet access taxes

Ways to discriminate against Brick& Mortar retailers Allowing Internet retailers to be exempt from all sales taxes.

Commission submits its report on April 12, 2000 Bridging of the digital divide. Protection of consumer privacy. A permanent ban on international tariffs on e-commerce. A simplification of state sales and use tax systems. Permanent ban on Internet access taxes. Extension of the Internet tax moratorium on multiple or discriminatory taxation. Clarification of nexus standards.

Recent Legislative Activity 8/2/01: The House Judiciary Subcommittee on Commercial and Administrative Law passed the Internet Tax Nondiscrimination Act. Calls for permanent ban on Internet access taxes and 5-year extension on current moratorium. Makes no mention of a simplification compact among the states. Will move to the full Judiciary committee in September. 10/21/01: Current ban on taxation will run out.

If a ban on new internet taxes is extended… …what will be the impact on local government sales tax collections?

Measuring Impact on Oklahoma Governments in 2000. Based on the respected Forrester/NRF Online Retail Index, B2C online retail sales totaled $44.9 bil in 2000. About 1% of those purchases, $449 mil, can be attributed to Oklahoma.

2000 Impact on Oklahoma State Sales Tax Collections At a 4.5% state tax rate, the state lost about $20.2 mil in sales tax collections. That’s a loss of about 1.5%.

2000 Impact on Oklahoma County Sales Tax Collections At an average county rate of 0. 4%, 63 out of 77 county governments lost about $1.8 million. That’s a decrease of about 1.9%. 14 of 77 counties did not collect sales tax.

2000 Impact on Oklahoma Municipal Sales Tax Collections At an average municipal sales tax rate of 2.89%, cities and towns lost about $13 mil. That’s a loss of about 1.5%.

Streamlined Sales Tax Project Formed in March of 2000 38 states are involved 32 as voting participants 6 as non-voting observers Objectives: Simplification of state & local sales & use taxes Standardization of tax administration across states Identification of computer software that could be used to implement the collection of sales tax

SSTP Participants/Observers No Sales Tax

Streamlined Sales Tax Project Dec. 2000: SSTP approves: Uniform Sales and Use Tax Administrative Act Streamlined Sales and Use Tax Agreement National Conference of State Legislatures (NCSL) also approved a simplification act. NCSL provisions are less comprehensive than SSTP Act State legislatures must adopt the act into law in their own states.

States That Have Signed SSTP or NCSL Legislation SSTP Act Enacted NCSL Act Enacted Modified Act Enacted

Questions?