Summary: Although the states can impose a tax on residents' purchases from out-of-state vendors, they cannot impose an obligation on those vendors to collect the tax unless the vendor has a substantial presence--called a nexus--in the state. For sales without nexus, purchasers are legally required to remit the tax, but purchaser compliance is generally much lower than seller compliance. Therefore, at this time, portions of sales and use taxes can be avoided. In 1999, state and local governments collected $203 billion in general sales tax revenues. On average, general sales taxes account for 33 percent of state and 11 percent of local tax revenues. Little empirical data exist on the key factors needed to calculate the amount of sales and use revenues that state and local governments lose on Internet and other remote sales. GAO constructed scenarios representing different assumptions about the important determinants of the loss. Under all scenarios, the size of tax loss from Internet sales for 2000 is less than two percent of aggregate general sales tax revenues. Under the scenario for 2003, the size of the tax loss from Internet sales ranged from less than one percent to about five percent. The results of GAO's scenarios highlight the importance of developing better data about Internet tax losses. Even with better data, the rapid and fundamental nature of innovations in electronic commerce means that policymaking regarding the tax treatment of Internet sales will be done in an environment of significant uncertainty.
