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Abstract: 

Historical ownership of sales tax revenues at the state and local government level and different economic incentives across businesses have caused sales taxation of Internet-related activity to become a hot-button issue, with widely different perspectives both across and within government and the business community. Some have asserted that the economic gains are so great that the technology should remain unfettered by regulatory control and taxation. Others have argued that, although the economic gains are important, the fiscal aspects are too significant to be ignored and that the economic gains would be enhanced through appropriate taxation. There are a number of key tax issues that must be addressed indetermining whether sales taxes should be imposed on Internet-based transactions, including (1) whether failure to impose taxes on Internetrelated activity hurts or helps economic growth and (2) the effects of the failure on perceptions of sales tax equity. This article focuses on just one aspect of the tax issue: how local government finance will be affected by expected growth in Internet-based transactions. The conclusion is that, though local sales taxation is much less important to local finance than property taxation, the revenue consequences of growth in Internet-related transactions can be significant for some local governments. Local governments stand to lose not only revenues they collect directly through local sales taxes but also those they receive indirectly through state government sales tax collections.

Keywords: Contribution of sales tax; e-commerce and local business revenue loss; direct and indirect losses for local governments

Affiliations:  1: University of Tennessee Center for Business and Economic Research; 2: University of Tennessee Center for Business and Economic Research.