The development of new technologies and digital processes has had a profound effect on the U.S economy as e-commerce sales have grown from $995.0 billion in 1999 to $2, 385 billion by 2006. The rapid growth in e-commerce affects state and local economies in several important ways. First, state and local governments continue to lose sales and use tax revenues because of the inability to collect taxes that are due. Second, firms change their best business practices to avoid creating a collection responsibility in certain states. Firms choose to locate their selling or warehousing activities to avoid creating nexus rather than locating where they can operate most efficiently. Also, local vendors face a competitive disadvantage to e-commerce competitors as consumers browse in shops on Main Street but then make their purchases online to evade the tax. Finally, there may be distributional consequences if lower – income consumers are more likely to make purchases in local stores where the tax is collected.
We estimate state and local sales tax losses arising from e-commerce for 46 states and the District of Columbia using both a baseline forecast and an optimistic forecast for e-commerce growth. B2B (business – to – business) sales account for approximately 93 percent of total e-commerce. In the baseline case, we estimate that annual national state and local sales tax losses on e-commerce will grow to $11.4 billion by 2012 for a six – year total loss of $52 billion. The more optimistic growth case estimates losses to reach $12.65 billion by 2012 and an aggregate loss of $56.3 billion.