Committee on the Budget, United States Senate
Hearing on "Internet Taxation in the New Millennium"
February 2, 2000

Mr. Chairman and Members of the Committee, I am Iris Lav, Deputy Director of the Center on Budget and Policy Priorities. I am accompanied today by Michael Mazerov, a Senior Policy Analyst at the Center. The Center is a non-profit research institute that studies government programs and policy issues that have an impact on low- and moderate-income households. The question of whether state and local governments will be able to apply their sales taxes to purchases made over the Internet has important implications for the well-being of lower-income Americans. The Center greatly appreciates the opportunity to present testimony on this issue this morning.


The Internet Sales Tax Issue

The sales tax is a critical revenue source for state and local governments. On average, sales tax receipts comprise one-fourth of all the tax revenues state and local governments use to finance education, health, human services, public safety, and many other essential programs. Many states rely on sales taxes for an even greater share of revenue.

In discussing sales taxation of Internet purchases, it is important to keep in mind that the sales tax is intended to be — and is — a tax on the purchaser of goods and services. That purchaser may be an individual or a business. Although the sales tax is a tax on purchasers, state and local governments frequently enlist sellers in the process of collecting the tax. When a purchase is made in a local store, for example, the sales tax is collected from the purchaser by the retailer at the time of sale and periodically remitted by the retailer to the state.

The growth of Internet, mail-order, and other "remote sales" in recent years represents a significant revenue problem for state and local governments. A large majority of the sales taxes due on remote sales are effectively uncollectible.(1) These taxes are uncollectible because a Supreme Court decision relieves mail order and Internet businesses without a "physical presence" in a state of the obligation that every store has to collect sale taxes from its customers and send them to the state treasury.(2)

When a seller does not collect and send the tax to the state of the purchaser, customers who receive the goods are supposed to pay state and local sales taxes directly. Consumers are supposed to file a tax return showing the value of the untaxed goods they have purchased from remote sellers and to pay the tax on those purchases. More than one-third of the states actually provide information and forms in their personal income tax booklets to help consumers pay sales taxes on purchases from out-of-state companies. Nonetheless, compliance with this self-remittance requirement is minuscule in the case of individual consumers and spotty in the case of businesses — especially small businesses.

The combination of weak tax compliance by consumers and the limited obligation of remote sellers to collect taxes is eroding the sales tax base of state and local governments. As I will discuss shortly, it is disproportionately upper-income households who are avoiding paying their fair share of sales taxes by purchasing from remote sellers. Both the revenue loss and the unfair tax advantages for the affluent are likely to increase because of the still more rapid growth in Internet purchasing that is projected to occur in the next few years.


Critical Decisions Ahead

The Congress may be called upon this year to address the taxation of remote sales. The Internet Tax Freedom Act (ITFA) enacted in October 1998 created an Advisory Commission on Electronic Commerce to study the issue. The Commission is scheduled to submit its recommendations to Congress by the end of April. All indications are that the Commission will be unable to muster the required super-majority in favor of any particular package of recommendations addressing the remote sales tax issue. Therefore, its final report seems likely to offer a number of possible options for congressional action. Without presuming to predict exactly what options the Commission will present, I want to lay out what appear to be the fundamental choices the Congress may consider for either maintaining the states quo or addressing state and local sales taxation of Internet sales.

We look at two options that would continue or increase the problems states face in attempting to tax fairly all like sales, and increase the likelihood that sales taxes will disproportionately burden lower-income purchasers. The other options, however, could help level the playing field and apply the taxes evenly and fairly.


Option One: Maintaining the Status Quo

One option Congress has is to do nothing, to refrain from any enacting any new legislation addressing the Internet sales taxation issue. Renewing the tax moratorium provisions of the Internet Tax Freedom Act in their current form, as some have proposed, is actually a variant of the do-nothing option; ITFA did not change current Supreme Court decisions regulating the ability of states and localities to apply sales taxes to Internet purchases. Even with ITFA in place, purchasers are still legally obligated to self-remit sales tax on their Internet purchases, and a state can require an Internet merchant to collect and remit sales tax to the state if the merchant has a physical presence within the state's borders.

Maintaining the status quo is likely to result in a continuing, steady erosion of state and local sales tax revenues. There are two principal reasons for this. First, Internet purchases are projected to grow sharply in coming years; Internet consultants Forrester Research project $144 billion in Internet purchases by individual consumers in 2003 and $1.3 trillion in Internet purchases by businesses.(3) These figures are seven times and twelve times larger, respectively, than the estimates for 1999. Because of the legal and practical barriers to effective taxation of Internet sales already discussed, much of the tax due on these purchases will not be collected.

Congressional inaction on Internet taxation policy is also likely to encourage more and more retailers that are currently collecting sales taxes on their Internet sales to cease doing so. At present, there are major unanswered legal questions regarding when so-called "clicks and mortar" businesses — retailers with both e-commerce Web sites and conventional stores — are obligated to charge tax on their Internet sales. Most clicks-and-mortar retailers charge sales tax to their Internet customers if the customers reside in a state in which the retailer has a physical store. For example, you can order from The Gap online, and in most states you will be charged the applicable sales tax because The Gap has stores throughout the country. But a handful of large companies have abandoned this practice. These companies structure their Internet operations as separate subsidiaries and contend that they have to collect sales taxes only in the few states in which the Internet sales subsidiary itself has its headquarters or owns a warehouse. For example, Barnes and Noble has bookstores throughout the United States, but Barnes and Noble.com, its affiliated Internet bookstore, collects sales taxes only from customers located in New Jersey, New York, and Virginia.(4)

Even the distinction between the physical store and the Internet subsidiary is becoming blurred. With each passing month, clicks-and-mortar companies are expanding the use of their stores to stimulate sales on their Web sites and to service customers who buy untaxed goods through the Internet. For example, one major toy retailer recently starting encouraging its Internet customers to return unwanted purchases at its stores.(5) As time goes on, more and more clicks-and-mortar retail chains are going to be tempted to play this game to obtain a short-term advantage over their competitors, and their competitors are likely to respond in kind. Eventually, few if any retail chains will be collecting sales taxes on their Internet sales. In sum, perpetuation of the status quo, under which states can only require physically-present retailers to collect and remit their sales tax, is likely to lead to a steadily increasing loss of state and local sales tax revenues.


Option Two: Enacting New Restrictions on State Taxation of Internet and Mail-Order Sales

The second option facing Congress is to constrain even more tightly the ability of states and localities to tax Internet, mail-order, and other remote sales. There are two leading types of proposals along these lines. The first type of proposal would exempt all Internet purchases from state and local sales taxation. Bills to accomplish this complete exemption have been introduced by Senator John McCain and jointly by Representatives John Kasich and John Boehner.(6) The second type of proposal allegedly "codifies" and "clarifies" existing Supreme Court decisions that define when a state can require an out-of-state business to collect its sales tax and pay its corporate income tax. In fact, however, the proposal goes far beyond codifying the status quo and includes important new restrictions on the ability of states and localities to collect sales taxes. This latter proposal was submitted to the Advisory Commission on Electronic Commerce by one of its members, Dean Andal of the California State Board of Equalization.(7) Mr. Andal has indicated that he expects this proposal to be introduced as a bill in Congress this session. These proposals would open up gaping new loopholes in state sales tax systems that would enormously compound the revenue losses arising from Internet commerce.

The Kasich/Boehner and McCain bills would deprive states of the power they now have to require purchasers to pay sales taxes themselves on their Internet purchases. Currently, for example, states can effectively collect sales taxes on cars, planes, and boats purchased out of state because registering the vehicle notifies tax authorities that a taxable purchase has been made. But under both bills a customer that purchased these vehicles over the Internet would be exempt from paying sales taxes, even if he purchased it from a dealer in his own state.

The McCain/Kasich/Boehner and the Andal proposals would also severely restrict the ability of states to require merchants to collect and remit sales taxes in many instances in which states currently have the power to impose this obligation. Under both proposals, for example, large retail chains would be free to place computers in their stores linked to their Web sites. Customers could examine the merchandise in the store and then order it using the in-store computer; in a sense, placing the Internet order would substitute for check-out. The orders would be delivered to customers' homes. Under the McCain/Kasich/Boehner proposals, products purchased using an Internet-linked computer in a retail store would be completely free of sales tax by law — even if the store and the purchaser's home are in the same state. The Andal proposal would free the seller from having to charge the sales tax on Internet purchases executed on a retail store computer so long as the purchase was delivered from an out-of-state location. Unlike the McCain/Kasich/Boehner plan, however, under the Andal plan states could still require purchasers to pay sales taxes on Internet purchases made in stores — with all the practical impediments to compliance with this requirement previously discussed. Under both proposals, the state/local revenue losses resulting from Internet purchases in retail stores could be enormous.

The Andal proposal would have impacts far beyond Internet commerce. For example, it would deprive states and localities of their current ability to impose a sales tax collection obligation on companies like Avon and Amway that have legions of door-to-door salespeople within their borders.(8) In this respect the Andal plan would reverse a Supreme Court decision dating back to 1944 — rendering his claim to be "codifying" Supreme Court decisions a highly misleading characterization of his proposal.(9)

In sum, the second broad option available to Congress — enacting new restrictions on the ability of states to tax Internet purchases — risks far-reaching and perhaps unintended impacts on the conventional retail sales tax base.


Option Three: Trading State Sales Tax Simplification for an Expanded Obligation of Internet and Mail-Order Merchants to Collect Sales Taxes

The third option available to Congress would be to enact legislation that cuts through the tangle of rules now governing taxation of remote sales and sets up rational, simple rules and procedures for collecting and remitting sales taxes. This course is to take up the invitation offered to Congress by the Supreme Court in its 1992 Quill decision on mail-order sales.

In Quill, the Court made clear that Congress could empower states to require out-of-state merchants to collect and remit sales taxes even if the merchants lacked a physical presence within their borders. The Court reaffirmed the physical presence requirement pending such congressional action. Proponents of maintaining the status quo frequently argue that businesses do not benefit from public services provided by states in which the businesses lack a physical presence. The Quill Court dismissed that argument, recognizing that mail-order companies like Quill would not be able to do business if states did not provide the roads on which their goods make their way to customers and a legal system that ensures that purchasers pay their bills.

The Supreme Court's sole rationale for barring states from requiring remote sellers to collect and remit sales taxes was the Court's belief that complying with the diverse sales tax rules of several thousand state and local governments would excessively burden interstate commerce. Thus, Congress has an option for addressing the Internet and mail-order sales tax problem pro-actively by specifying a set of standards that state sales tax laws would have to satisfy before states could require remote sellers to comply with them.

The various "Tax Fairness for Main Street Business" acts introduced by former Senator Dale Bumpers in previous sessions of Congress could be the starting point for implementing this approach. The Bumpers legislation largely focused on intra-state simplification of sales tax laws.(10) Those provisions could be expanded, for example, by mandating that what is subject to sales tax in a particular state be identical for the state sales tax and any sales taxes levied by local governments. This intra-state standardization could be supplemented with inter-state standardization. For example, the authority of states to require non-physically-present merchants to collect and remit sales taxes could be conditioned on the use of common definitions among all states for exempted goods, a standard format for state sales tax returns, and similar ideas that have been identified in the course of numerous discussions between industry and state tax authorities.

Finally, as proposed by Senator Bumpers and long supported by state and local government groups, federal legislation could include an exemption for small businesses from sales tax collection obligations in states in which they lack a physical presence. Such a rule could remove the concern that "mom-and-pop" businesses first getting into electronic commerce would not have the resources or sophistication to collect and remit sales taxes on behalf of numerous states.


Option Four: Endorsing State and Local Government Efforts to Develop a Technology-Based Solution to the Remote Sales Problem

As just discussed, one broad approach to solving the remote sales problem would involve a quid pro quo. Internet and mail order merchants would have an "expanded duty to collect" sales taxes only if states simplified and standardized sales tax rules. This remains the approach being pressed by representatives of brick-and-mortar retail interests.(11) Until quite recently, it was also the preferred solution of all the major organizations representing state and local public officials. In just the past few months, however, these public sector groups have offered a new, technology-based plan for addressing the remote sales problem.

In mid-November, under the leadership of Utah Governor Michael Leavitt, the National Governors' Association and the other major state and local government organizations made a public commitment to develop and implement a "Streamlined Sales Tax System for the 21st Century."(12) State and local government organizations intend to issue a Request for Proposals to the private sector for the development of an entirely privatized sales tax collection system. Under such a system, one or more organizations (such as existing credit card networks) would become intermediaries between remote sellers and state tax authorities and, using software the firms would develop, would collect tax from customers at the time a sale occurs and immediately remit it electronically to the states. The intermediaries would be compensated for this service through a small per-transaction fee. To make this work, remote sellers would install on their computer systems software that would be furnished by the intermediary and that would pass to the intermediary sufficient information to ensure that the proper sales tax could be collected from the customer. To simplify the development of the technology, state and local governments would also implement the kinds of proposals discussed above to standardize sales tax rules and definitions on both an intra- and interstate basis.

The state and local government organizations have committed to developing the "Streamlined Sales Tax System" on their own and piloting it with remote sellers that they expect will volunteer to test it. They believe that in the long run the system will be attractive enough to remote sellers that the vast majority will voluntarily adopt it and that no federal legislation to compel adoption would be needed. Nonetheless, some type of congressional endorsement of this approach in the near term could make a crucial contribution to the ultimate success of the NGA proposal. Without such an endorsement, remote sellers who want to perpetuate the effectively tax-free status of their sales may be tempted to scuttle development of the technology by refusing to provide input on the features the software would need to interface properly with their customer billing systems. Even more important, the credit card networks, sales tax software developers, and other potential builders of the "Streamlined System" may be reluctant to make up-front investments if they are concerned that Congress will devalue those investments by enacting even broader prohibitions on state taxation of Internet purchases — such as the Andal, McCain, or Kasich/Boehner proposals.

Accordingly, Congress could help clarify and improve the situation without enacting legislation that would impose a solution on remote sellers or states and localities. Congress could contribute to a resolution of the remote sales issue by approving a "sense of the Congress" resolution that "backs" the voluntary system that is under development. The resolution could contain the following points:

It contemplating such a resolution, members of Congress should be reassured that there is strong public support for taxing Internet and retail store purchases alike. A January 2000 USA Today/CNN/Gallup poll found that 65 percent of Americans answered "yes" when asked: "Do you think people should be required to pay the same sales tax for purchases made over the Internet as they would if they had bought the item in person at a local store?"(13)


The Consequences for Lower-Income Americans of Keeping the Internet a Sales Tax Haven

The preceding discussion indicates that congressional inaction or endorsement of the status quo on Internet sales taxation is likely to result in a steady erosion of state and local sales tax revenues. Rather than being eroded, much of the state and local sales tax base could disappear down a massive sinkhole were Congress to enact the types of restrictions on state Internet taxation authority being advocated by Mr. Andal, Senator McCain, or Representatives Kasich and Boehner. Either course would have serious adverse impacts on the well-being of lower-income Americans.


The Digital Divide: Real and Likely to Persist

If the de facto sales tax exemption for Internet and mail-order sales is not eliminated or is broadened, businesses and affluent households increasingly will avoid sales taxes that lower-income households consigned to shopping in stores will continue to pay. Lower-income consumers without the resources to shop on-line or by mail are likely to end up paying an even more disproportionate share of state and local sales taxes.

The ability to engage in Internet shopping requires:

For many poor and near-poor people in America, these requirements in combination are likely to remain insurmountable barriers to routine use of the Internet for shopping for the foreseeable future.

Many efforts to close the digital divide are focused on expanding access to computers in public spaces such as schools and libraries. But it seems unlikely that many low-income people would make special trips to libraries and other public facilities to access the Internet for shopping — even assuming that the use of a limited supply of publicly-available computers for shopping purposes would be permitted. Moreover, employers are increasingly cracking down on non-work-related use of the Internet on the job.(14) Thus, actual ownership of an Internet-equipped computer or other Internet access device in the home is likely to remain the price of admission to the cyber-mall.

At present, households with incomes over $75,000 remain more than eight times as likely to have home Internet access as households with incomes between $10,000 and $15,000.(15) It is little wonder, then, that while households with incomes below $25,000 made 25 percent of all retail purchases in 1998, they made only 6 percent of on-line purchases.(16)

Part of the explanation for these gaps may be persistent difficulties lower-income households have in obtaining credit to pay the up-front costs of acquiring a computer. Ted Waitt, CEO of Gateway Computer, a company specializing in direct sales of computers to individuals, recently provided information to the Advisory Commission on Electronic Commerce about the barriers many families face in obtaining sufficient credit to purchase a computer:

In . . . October of this year, Gateway — our company — refused 184,000 families credit for PCs. In the month of November, it was closer to 250,000 families that we declined credit for a PC. We called these people back and surveyed them and found that they didn't get a PC anywhere else. They cannot get credit. . . . And the number one reason they want to buy this PC is for their children, so their children don't fall behind, and so they can get their kids on the Internet.(17)

The lack of a general-purpose credit card is also a significant barrier to the ability of many lower-income families to engage in on-line shopping. Many Internet service providers require a credit card to set up an e-mail and Web access account for subscribers. Few Internet merchants yet accept any of the various types of "electronic cash" accounts that have been devised, which in any case often are established through a billing to a credit card. The extent of this barrier is highlighted by a recent study of a sample of EITC recipients in Chicago.(18) According to the study, fully 60 percent of the EITC recipients with incomes below about $13,000 had no relationships with financial institutions of any type — no savings account, no checking account, no credit card, no loans or mortgage. About one-quarter of the families with incomes between about $13,000 and about $25,000 similarly had no contact with financial institutions. For such families, use of the Internet for shopping would be virtually impossible.

As the costs of computers and Internet access services continue to drop, having a low income per se may prove less of a barrier to accessing the Internet than it is at present.(19) Even for families that could accumulate enough money to acquire an Internet-equipped computer, however, a lack of knowledge about how to use computers and navigate the Internet seems likely to remain a continuing barrier to widespread acquisition of these devices among less-educated, lower-income segments of the population.

The latest (July 1999) U.S. Commerce Department study of the "digital divide" found that 48.9 percent of households headed by someone who had completed college used the Internet at home, whereas only 16.3 percent of households headed by someone with a high school education did so. Only 6.3 percent of households headed by someone who started but failed to complete high school used the Internet.(20)

The gap in at-home Internet access between more- and less-educated households actually grew between 1997 and 1998; for example the rate of home Internet access by college-educated households exceeded that of high-school drop-out households by 35.3 percentage points in 1997 and 42.6 percentage points in 1998. Educational attainment in the population changes only slowly. Because low educational attainment by household heads is closely associated with both low rates of Internet use and low household income, for the foreseeable future it seems likely that lower-income households will remain much less able to access the Internet for shopping than more affluent households.(21)

The persistent income gap in catalog shopping is the final piece of evidence suggesting that low- and moderate-income households may continue to be less likely than the affluent to shop on the Internet for a considerable period of time. The barriers to catalog shopping are relatively low: the ability to read a free catalog, fill out an order form, and visit a Post office or store where cash can be converted into a money order. Despite these relatively low barriers, only 29.3 percent of households with incomes below $25,000 shop by catalog at present, more than 100 years after the Sears catalog came into being.(22) Households with incomes above $80,000 are more than twice as likely to shop from catalogs as the $25,000-and-under income group. With the prerequisites for Internet shopping so much greater than for catalog shopping, the digital divide between upper-income and lower-income groups in on-line shopping seems likely to be wider and longer-lasting than is sometimes asserted.


Paying a Disproportionate Share of Sales Taxes and/or Higher Sales Taxes

If states and localities remain effectively powerless to tax goods and services purchased through the mail and on the Internet, the share of sales taxes paid by relatively affluent households and businesses will decline. Lower-income households consigned to shopping in local stores will consequently bear more than their fair share of sales taxes.

Furthermore, the erosion of the sales tax base resulting from on-line purchasing by affluent consumers and businesses could compel states and localities to raise sales tax rates to preserve a desired level of sales tax revenues. A vicious cycle leading to ever-higher sales tax burdens on the poor could ensue: tax rate increases could encourage more on-line buying by businesses and the affluent, forcing further rounds of rate increases. Ultimately, low- and moderate-income households unable to buy on-line could be forced to devote more income to paying sales taxes — money that could be used instead for education, transportation, child care and other services the poor need to participate in the labor force.


Reduced State and Local Services

Numerous studies project hundreds of billions of dollars in annual purchases by consumers and businesses over the Internet just three to four years from now. (23) Not all such purchases represent lost sales tax revenues to state and local governments, of course; some will be purchases of goods and services that are not taxed, and others represent purchases upon which the tax will be remitted by the seller or the purchaser. Nonetheless, given current growth projections for electronic commerce, state and local governments conservatively could be losing $10 billion in tax revenues annually by 2003 from untaxed Internet sales — this in addition to $5 billion in annual sales tax revenue losses from traditional mail-order purchases.(24) Revenue losses would continue to mount thereafter; for example, one prominent Internet industry forecaster projects a 28 percent increase in consumer Internet purchases between 2003 and 2004.(25) Sales tax revenue losses would be even more severe if new restrictions on the ability of states to tax Internet and other remote sales were enacted.

Revenue losses of this magnitude should be regarded as significant by any objective standard. Fifteen billion dollars is more than two and one-half times what state and local governments currently spend each year on public libraries; it is the equivalent of $50,000 salaries for 300,000 teachers.(26) Revenue losses of these magnitudes could significantly impair the ability of some states and localities to meet demands for education, job training, child care, health, and other services that low- and moderate-income families depend on to get ahead in an increasingly technology-oriented economy.



If initial steps are not taken soon to end the de facto sales tax exemption that applies to most Internet and mail-order purchases, the sales tax burden on lower-income Americans is likely to rise and the access of all citizens to high-quality education and other critical state and local services could be impaired. These outcomes will be all the more severe should Congress enact a blanket sales tax exemption for Internet purchases or even tighter restrictions on the ability of states to require remote sellers to collect and remit sales taxes than currently exist. There is a practical alternative to both of these options. Congressional endorsement of the principle of equal tax treatment of retail store purchases, mail-order purchases, and Internet purchases could encourage the electronic commerce and mail order industries to work constructively with state and local governments toward a workable compromise. Such a compromise could achieve a reduction in sales tax compliance costs for many businesses, while ensuring both that no business or individual avoids paying a fair share of sales tax and that state and local governments remain capable of financing necessary services. 

End notes

1. Technically, the tax that is due on a purchase from an out-of-state seller is a use tax, not a sales tax. However, the two taxes are functionally equivalent.

2. Quill Corporation v. North Dakota (1992) reaffirmed the physical presence requirement originally established in National Bellas Hess v. Illinois (1967).

3. For business-to-consumer Internet sales, see: Seema Williams, "Post-Web Retail," Forrester Research, September 1999. For business-to-business Internet sales, see: "The Online Revolution," Wall Street Journal, July 12, 1999, p. R6, reporting on Forrester Research forecasts.

4. Form S-1/A for Barnes and Noble.com filed with the Securities and Exchange Commission, March 18, 1999.

5. See: www.kbkids.com/help/return.html. Kbkids.com collects and remits sales taxes only in Colorado, Virginia, and Massachusetts. See: www.kbids.com/help/taxes.html.

6. S. 1611 (McCain) and H.R. 3252 (Kasich/Boehner).

7. A Uniform Jurisdictional Standard: Applying the Substantial Physical Presence Standard to Electronic Commerce; available at www.boe.ca.gov/members/dandal/eleccom/pdf/proposal.pdf.

8. Mr. Andal's proposed "Uniform Jurisdictional Standard" declares that a state may not require an out-of-state business to collect and remit the state's sales tax if its activities within the state's borders are limited to "the solicitation of orders or contracts by such person . . . for sales of tangible or intangible personal property . . . which orders or contracts are approved or rejected outside the State and, if approved, are fulfilled by shipment or delivery of property from a point outside the State. . . ."

9. General Trading Co. v. Iowa (1944).

10. See, for example, S. 1586., 105th Congress.

11. See the World Wide Web site of the "E-Fairness Coalition" at www.e-fairness.org.

12. The proposal is available at www.ecommercecommission.org/document/StreamlSalesTax134.doc .

13. USA Today, January 19, 2000. Twenty-eight percent of those polled responded "no" to the question.

14. "Companies Move to Curb Web Surfing on the Job," Washington Post, December 20, 1999.

15. U.S. Department of Commerce, Falling Through the Net: Defining the Digital Divide, A Report on the Telecommunications and Information Technology Gap in America, July 1999, Chart I-21, p. 25. Available at www.ntia.doc.gov/ntiahome/digitaldivide/ .

16. November 1998 Forrester Research, Inc. study summarized in "Digital Commerce: The Issues," CQ Outlook (Congressional Quarterly), February 20, 1999, p. 14.

17. Transcript of the December 15, 1999 meeting of the Advisory Commission on Electronic Commerce, pp. 444-445. Available at www.ecommercecommission.org/sanfran/tr1214.htm.

18. Timothy M. Smeeding, Katherin E. Ross, and Michael O'Connor, The Economic Impact of the Earned Income Tax Credit (EITC): Consumption, Savings, and Debt, September 1999.

19. It should be noted, however, that computer prices are currently on the rise — at least temporarily. See: "Reversing Course, Home PC Prices Head Higher," Wall Street Journal, January 13, 2000.

20. Falling Through the Net, Table I-4(d), p. 32.

21. The average 1998 earnings for an adult lacking a high school diploma was $19,052; for a high-school graduate, $28,742; for a college graduate, $55,057; and for someone with a professional degree, $108,926. Census Bureau, Money Income in the United States, 1998, September 1999.

22. See: Catalog Age's 1999 Consumer Catalog Shopping Survey, available at www.catalogagemag.com/ Magazines/CatalogAge/Survey/19990508.html.

23. For forecasts of business-to-business Internet sales, see: Reuters, "E-Commerce Revenue Seen at $1.1 Trillion by 2002," June 23, 1999 (Deloitte & Touche estimate, www.news.com/News/Item/0,4,3825,00.html )"The Online Revolution," Wall Street Journal, July 12, 1999, p. R6 (Forrester Research, Inc. estimate); "B2B Commerce Boom Expected," (Yankee Group estimate, cyberatlas.internet.com/market/professional/ b2b.html.) For forecasts of business-to-consumer Internet sales, see: "The Online Revolution, Wall Street Journal, July 12, 1999, p. R6 (Jupiter Communications); "Internet Retail Sales in '99 Are Expected to Double," Wall Street Journal, May 18, 1999, p. A4 (Direct Marketing Association estimate); Seema Williams, Forrester Research, "Synchronous Selling," Presentation to the Federation of Tax Administrators' Annual Meeting, June 7, 1999.

24. Harley Duncan, Executive Director of the Federation of Tax Administrators, has taken projections of consumer Internet purchases in 2003 prepared by Forrester Research, Inc. and shown that they imply as much as $4 billion in lost state and local sales tax revenues in that year. (See: "State Revenue Losses from E-Commerce Underestimated," State Tax Notes, July 26, 1999, p. 245. Forrester recently predicted that consumer Internet purchases in 2004 would be $184 billion, 70 percent greater than the $108 billion forecast for 2003 that formed the basis of Duncan's estimate. See: Seema Williams, "Post-Web Retail," September 1999, available at www.forrester.com/ER/Research/Report/0,1338,7772,FF.html.)

Like most industry analysts, Forrester expects business-to-business sales over the Internet to remain many times larger than consumer purchases. Forrester currently projects $1.3 trillion in U.S. business-to-business Internet sales in 2003. (See: "The Online Revolution," Wall Street Journal, July 12, 1999, p. R6.) If just one-third of these sales represent items that would be subject to state and local sales taxes, and if it is assumed that just one-third of the taxes due on this one-third of sales would go uncollected, then the 2003 revenue loss from untaxed business-to-business Internet sales (at the average 6.5 percent tax rate used by Duncan) would be $9.6 billion. (Assuming that one-third of the $1.3 trillion would be subject to sales tax seems reasonable. Computers, industrial equipment, office supplies, and shipping supplies alone account for 40 percent of the total; such items generally do not qualify for sales tax exemptions). Combining the $9.6 billion in lost revenues on business-to-business sales with the $4 billion in lost revenues on consumer purchases estimated by Duncan yields $13.6 billion. Thus, an estimated $10 billion total revenue loss from untaxed Internet sales in 2003 appears reasonable, if not conservative.

The U.S. Advisory Commission on Intergovernmental Relations estimated the nationwide state and local government revenue loss from untaxed mail order sales in 1994 at $3.3 billion. (See: Taxation of Interstate Mail Order Sales, 1994 Revenue Estimates.) According to the Direct Marketing Association, catalog sales grew 8.6 percent annually between 1994 and 1999. (See: Reuters, "Internet Sales, Ad Spending Seen Climbing Sharply," May 19, 1999, available at news.excite.com/news/r/990519/02/net-internet-marketing.html.) If all forms of direct marketing matched the growth in catalog sales during the 1994-9 period and the share of all such sales going untaxed remained constant, a rough estimate of untaxed mail order sales in 1999 would be $5 billion.

25. See the first paragraph of note 24.

26. According to the U.S. Census Bureau, state and local governments combined spent $5.7 billion on libraries in FY95-96, the most current fiscal year for which data are available. See: www.census.gov/ftp/pub/govs/estimate/96stlus.txt .