Proponents of online taxes quote several University of Tennessee studies, which found states missed out on $13.3 billion in 2001 collections. But the Direct Marketing Association performed its own study of online taxes and released contrary results this week.
The DMA finds two basic problems with UT's analysis. First, UT researchers included certain business-to-business transactions that actually did create tax revenue for the state in its count of missed taxes. Through the "Electronic Data Interchange," a system that pre-dates the Internet, businesses purchase supplies and materials from one another through networks. Companies using this inter-state medium pay the appropriate sales and use taxes, and therefore shouldn't be lumped into the same category with business-to-consumer online sales.
The other big problem highlighted by the DMA concerns the growth assumptions used by UT to project future missed taxes. UT researchers predicted that if online sales were still tax-free, states could miss out on $55 billion in tax revenues in 2011. However, they used projections from Forrester Research, created at the height of Internet hype (in 2000) and based on the assumption that "pure play" Internet retailers would flourish. With some notable exceptions, such as Amazon.com
In contrast to UT's claim that states missed out on $13.3 billion in 2001, the DMA's study says the figure was closer to $1.9 billion. And while UT finds states could be stiffed by $55 billion in 2011, the DMA claims it's more like $4.5 billion. DMA Economist Peter A. Johnson used current data from the Commerce Department's Census Bureau to draw his conclusions.
Granted, the DMA generally takes a libertarian stance on most issues. But its findings do cast a shadow of doubt on the UT studies' validity.
Proponents of taxing all online commerce will argue that a "level playing field" doesn't exist. Companies with both offline and online presence, such as Wal-Mart
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