State and Local Sales and Use Taxes and Internet Commerce Page: 8 of 16
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CRS-5
a local sales tax (which often varies among localities within the state) on the state
sales tax; 11 states and the District of Columbia levy a single rate (see Table 2) with
no local taxes. Some states in the group of 39 may collect a uniform local tax along
with the state tax and send the local revenue share back to the localities. This
structure would look like a single rate to the consumer because vendors typically do
not differentiate between the state and local share. For example, vendors in Virginia
levy a 5.0% sales tax on purchases and remit the entire amount to the state. The state
then sends what would have been raised by a 1% tax back to the local jurisdiction
where the tax was collected. The state of Virginia keeps the remaining 4.0%.
Generally, states with a broader base can collect the same amount of revenue at
a lower rate than a state with a narrow base. Mississippi, Rhode Island, and
Tennessee have the highest state sales tax rate of 7.0%. However, in 2006, Alabama
had the highest potential combined state and local rate of 12.0%. Residents in high
sales tax rate jurisdictions could gain from Internet purchases (and tax evasion) more
than those in low tax rate states. Recognizing this potential revenue drain, many
states have stepped up efforts to inform consumers of their responsibility to pay use
taxes on internet and mail-order catalog purchases.18 As suggested earlier, states with
high rates and whose residents have a greater incentive to evade taxes are
exposed to greater potential revenue losses from the growth of Internet commerce.
Because of the greater potential losses, these states are more likely to support reforms
that help maintain their sales and use tax revenue base.
Table 2 presents the sales tax rates for the 50 states, their localities, and the
District of Columbia. Also reported in Table 2 is the reliance (as measured by CRS)
of state and local governments on the general sales (or gross receipts) tax. Even
though gross receipts taxes have more in common with traditional business taxes, the
Bureau of the Census combines them with general sales taxes.19 Depending on the
state law and the vendor, revenue generated by Internet transactions with out-of-state
purchasers may or may not fall under the gross receipts tax.20
Internet Taxes: Economic Issues
During the debate about "Internet taxes," some economic issues will be
important to consider. How will the treatment of Internet taxes influence the
efficiency and equity of state tax systems? What will be the impact of changes in the
treatment of Internet transactions on states that are more reliant on the sales tax?18 For example, see Chris Micheli, "California Strengthens Sales/Use Tax Collections,"
State Tax Notes, Dec. 15, 2003, pp. 964-965.
19 The Bureau of the Census also collects data on excise taxes and selective sales. We do
not report these receipts because they are typically collected at the wholesale level, not at
the point of retail transaction. For example, the gasoline excise tax is typically paid by the
carrier (tanker truck) at the point of collection (the end of the pipeline), not retail sale.
20 Under a gross receipts tax (GRT), a vendor remits a designated percentage (e.g., 5% in
New Mexico) of monthly gross receipts (or sales revenue) to the state. A gross receipts tax
is different from the sales tax because the vendor is legally responsible for paying the tax,
not the purchaser. Under the sales tax, the vendor acts as the collection agent for the taxing
jurisdiction and is not technically "paying" the tax; the buyer is paying the tax.
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Maguire, Steven. State and Local Sales and Use Taxes and Internet Commerce, report, March 9, 2006; Washington D.C.. (https://digital.library.unt.edu/ark:/67531/metacrs9320/m1/8/: accessed July 17, 2024), University of North Texas Libraries, UNT Digital Library, https://digital.library.unt.edu; crediting UNT Libraries Government Documents Department.