DMA: E-Commerce Overblown, and Shouldn’t be Taxed

The tax revenue that Internet-based transactions could generate is generally overstated and should not be used to expand the definition of nexus on out-of-state sales, according to a new report from the Direct Marketing Association.

In 1992, the U.S. Supreme Court upheld its earlier ruling that out-of-state mail order sales could be taxed in the home state of the recipients because there is no physical nexus present.

One reason for these inflated figures is that some earlier studies of Internet commerce have lumped electronic data interchange (EDI) transactions common in business-to-business marketing with consumer purchases through the Internet.

The DMA contends that projections by the University of Tennessee and Forrester Research Group about uncollected taxes on e-commerce transactions are flawed and would not have yielded tax revenue estimated at $13 billion in 2001 and $55 billion by 2011.

The analysis in this study, based on U.S. Census Bureau data, suggests that uncollected online commerce taxes would have yielded only about $1.9 billion in 2001 and not more than $4.5 billion by 2011.

This study was prompted because a number of state governments–which are generally reported to be hurting financially–have recently been calling for a changed definition of nexus because of the apparently booming number of transactions taking place over the Internet.

Overall, the DMA report contends that the tax-revenue potential of the Internet has been exaggerated as were most claims about it a few years ago.

One principal reason for this: the University of Tennessee studies have failed to distinguish between business-to-business and business to-consumer transactions and tend to lump the longstanding electronic data interchange (EDI) transactions used in business-to-business with consumer online purchases.

For several decades, the DMA contends, businesses have used EDI networks for purchasing, invoicing and paying. According to the U.S. Department of Commerce, in 2000, EDI-type networks accounted for 95% of manufacturers’ shipments and the Internet only 5%.

The DMA further argues that since EDI transactions typically funnel purchases from several different suppliers to a single business buyer like a manufacturer “this type of e-commerce transaction has never been shown to pose a threat to uncollected sales taxes.”

In addition, the DMA disputes the University of Tennessee’s contention that e-commerce was to have grown by 38% between 1999 and 2011, citing Commerce Department projections of a 13% annual growth rate.

Nevertheless, the DMA concedes states are losing out on revenue from Internet-based sales and recommends further study.