Order Code RL31252
CRS Report for Congress
Received through the CRS Web
Internet Commerce and
State Sales and Use Taxes
January 18, 2002
Steven Maguire
Economist
Government and Finance Division
Congressional Research Service ˜ The Library of Congress

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Internet Commerce and State Sales and Use Taxes
Summary
In theory, state sales and use taxes are based on the destination principle. The
destination principle prescribes that taxes should be paid where the consumption takes
place. Sales taxes collected at the point of sale achieve this if consumption takes
place near the point of transaction, which is usually a valid assumption. Alternatively,
consumers owe a use tax on products purchased out-of-state and used in their home
state where consumption likely takes place.
However, under current law, states cannot reach beyond their borders and
compel out-of-state vendors without nexus in the state to collect the use tax owed by
state residents. The Supreme Court has ruled that requiring remote vendors to collect
the use tax would pose an undue burden on interstate commerce. States are
concerned because they anticipate gradually losing more tax revenue as the growth
of Internet commerce allows more residents to buy products from vendors located
out-of-state and evade use taxes. Generally, “Internet taxes” are existing use taxes
and taxes on Internet access services.
The size of the revenue loss from Internet commerce and subsequent tax evasion
is uncertain. The General Accounting Office estimates that the state revenue loss in
2003 could be from $1 billion to $12.4 billion. States that rely more heavily on the
sales and use tax will likely lose more revenue than states less reliant on the sales and
use tax.
Congress is involved in this issue because commerce conducted by parties in
different states over the Internet falls under the Commerce Clause of the Constitution.
Currently, an “Internet Tax Moratorium” prohibits 1) new taxes on Internet access
services, and 2) multiple or discriminatory taxes on Internet commerce. This
moratorium was created by the Internet Tax Freedom Act (ITFA) of 1998 and had
expired on October 21, 2001. Congress extended the “Internet Tax Moratorium”
through November 1, 2003, with P.L. 107-75, enacted on November 28, 2001.
The degree of congressional involvement is an open question. Congress could
do nothing and allow the moratorium to expire and not address the use tax issue. Or,
Congress could: 1) extend the moratorium (or make it permanent) and/or 2) address
the use tax issue. Opponents of remote vendor use tax collection responsibility
would support a permanent moratorium and a clearer definition of nexus for use tax
purposes. In contrast, many state officials are opposed to a permanent moratorium
and would like Congress to change the law and require out-of-state vendors without
nexus to collect state use taxes. Simplification and harmonization of state tax systems
are likely prerequisites for Congress to consider approval of increased collection
authority for states. This report will be updated as legislative events warrant.

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Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
A Brief History of the Sales and Use Tax . . . . . . . . . . . . . . . . . . . . . . 1
What are “Internet Taxes”? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Two Components of the Sales and Use Tax . . . . . . . . . . . . . . . . . . . . . . . . 3
Tax Base . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Tax Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Internet Taxes: Economic Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Sales Tax Reliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
State Revenue Loss Estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Policy Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Passive Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Active Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
List of Tables
Table 1. State General Sales and Gross Receipts Taxes as Percent of
Total Personal Income, by State, FY2000 . . . . . . . . . . . . . . . . . . . . . . . . 10
Table 2. Reliance on the Sales and Gross Receipts Tax, by State, FY2000 . . . 12

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Internet Commerce and
State Sales and Use Taxes
Introduction
State governments rely on sales and use taxes for approximately one-third
(32.3%) of their total tax revenue – or approximately $174 billion in FY2000.1 Local
governments derived 16.4% of their tax revenue or $51.6 billion from local sales and
use taxes in FY1999.2 Both state and local sales taxes are collected by vendors at the
time of transaction and are levied at a percentage of a product’s retail price.
Alternatively, use taxes are not collected by vendors if they do not have nexus
(loosely defined as a physical presence) in the consumer’s state. Consumers are
required to remit use taxes to their taxing jurisdiction. However, compliance with this
requirement is quite low. Because of the low compliance, many observers suggest
that the expansion of the internet as a means of transacting business across state lines,
both from business to consumer (B to C) and from business to business (B to B),
threatens to diminish the ability of state and local governments to collect sales and use
taxes.
Congress has a role in this issue because commerce between parties in different
states conducted over the Internet falls under the Commerce Clause of the
Constitution.3 Congress can either take an active or passive role in the “Internet tax”
debate. This report intends to clarify important issues in the Internet tax debate.
Background
A Brief History of the Sales and Use Tax. In 1932, Mississippi was the
first state to impose a general state sales tax.4 During the remainder of the 1930s, an
era characterized by declining revenue from corporate and individual income taxes,
1U.S. Bureau of the Census, “Summary of State and Local Government Tax Revenue,”
http://www.census.gov/govs/qtax/table2.txt, visited Nov. 27, 2001.
2U.S. Bureau of the Census, “United States State and Local Government Finances by Level
of Government: 1998-99,” http://www.census.gov/govs/estimate/9900us.html, visited Jan. 8,
2002.
3U.S. Constitution, art. 1, sec. 8.
4In Mississippi, a use tax, the companion to the sales tax, was added in 1938. A use tax is
a tax on the use of a product. In the early years of the sales tax, states began with general
sales then added the use tax. Eventually, states adopting a sales tax included the use tax in
the enacting legislation.

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CRS-2
23 other states followed suit and implemented a general sales tax.5 At the time, the
sales tax was relatively easy to administer and could raise a significant amount of
revenue with a relatively low rate.6 Given the relative success of the sales tax in
raising revenue, 45 states and the District of Columbia added the sales tax to their tax
infrastructure by the late 1960s. The last of the 45 states to enact a general sales and
use tax was Vermont in 1969.7
What are “Internet Taxes”? Over the last several years, a number of bills
have been introduced in Congress that address “Internet taxes.”8 For this report, and
in the majority of the legislation introduced, “Internet taxes” refer to two sub-federal
taxes: state sales taxes on Internet access services (sometimes referred to as Internet
access taxes) and state sales and use taxes on products purchased over the Internet.9
Internet access taxes, in states where they exist, are typically a sales tax (or gross
receipts tax, GRT) on Internet access services.10 The Internet Tax Freedom Act
(ITFA) defines Internet access service as a service “...that enables users to access
content, information, electronic mail, or other services offered over the Internet....”11
The economic burden of an Internet access tax is shared by access providers (such as
America Online and the Microsoft Network) and consumers of Internet services.
The recently passed extension of the Internet tax moratorium (P.L. 107-75)
prohibits taxes on Internet access unless they existed before the original passage of
the ITFA in October 1998. The extension of the moratorium expires November 1,
2003. A permanent prohibition of Internet access taxes would prevent state and local
governments from ever assessing a sales tax (or GRT) on the provision of these
services.
5Fox, William F., ed., Sales Taxation: Critical Issues in Policy and Administration, Sales
Tax Trends and Issues, by Ebel, Robert and Christopher Zimmerman (Westport, CT: Praeger,
1992), pp. 3-26.
6The highest rate in 1934 was 3%, which was considered quite high at the time. Today, in
some Oklahoma jurisdictions, the rate can be as high as 9.75%.
7The five states without a state sales tax are: Alaska, Delaware, Montana, New Hampshire,
and Oregon.
8For a review of the recently passed moratorium extension, H.R. 1552 (P.L. 107-75), and
other Internet related legislation introduced in the 107th Congress, see: U.S. Library of
Congress, Congressional Research Service, Internet Tax Bills in the 107th Congress: A Brief
Comparison, by Nonna Noto, CRS Report RL31158.
9For more information on federal Internet access fees and charges, see: U.S. Library of
Congress, Congressional Research Service, Internet Service and Access Charges, by Angele
Gilroy, CRS Report RS20579.
10A gross receipts tax, such as New Mexico’s, is a business tax that is levied on all of the
revenues generated by a business operating in the state. The grand-fathering provision in the
Internet Tax Freedom Act, allowed states with Internet access taxes in place to keep them.
The current list of states with Internet access taxes: Hawaii, New Mexico, North Dakota,
Ohio, South Dakota, Tennessee, Texas, Washington, and Wisconsin.
11P.L. 105-277, Title XI.

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CRS-3
The second type of “Internet tax” is the imposition of the sales and use tax on
transactions arranged over the Internet. The expanding acceptance of the Internet as
an alternative to traditional retail transactions has complicated the collection of this
tax. Generally, if a vendor does not have “nexus” (loosely defined as a physical
presence) in the buyer’s home state, then the vendor is not required to collect the
sales or use tax. In these situations – where the vendor does not have nexus – the
buyer is required to remit a use tax to his or her state government. In reality,
consumer compliance with this requirement is quite low. Thus, contrary to what
some observers say, Internet purchases are “tax-free” only in the sense that consumers
are evading the use tax due on those transactions.12
The variation among the state and local governments in the administration of the
sales tax is at the center of the Internet tax debate. The U.S. Supreme Court has ruled
that the collection of sales taxes by remote vendors would be too burdensome; there
are thousands of taxing jurisdictions, each with its own rates and base. In an effort
to minimize that administrative burden, many states are working together to simplify
and standardize their tax systems in the hope that Congress will grant them the
authority to require remote vendors to collect the sales tax. Simplification of sales
and use taxes will be difficult because of the extensive variation among states in the
administration of the sales and use tax. Some of the issues that will likely arise in the
Internet tax debate are explored below.
Two Components of the Sales and Use Tax
The revenue that a sales and use tax generates, assuming a given level of
compliance, depends upon the chosen rate and the base to which the rate applies. The
more narrow the base the higher the rate must be to raise an equivalent amount of
revenue. States often have similar consumption items included in their tax base, but
they are far from uniform. Tax rates can also vary considerably, depending on the
state’s reliance on other revenue sources.
Tax Base. The sales tax, which is often considered a consumption tax, is
perhaps better identified as a transaction tax on tangible personal property. The sales
tax is normally considered to be a general consumption tax, although expenditures on
Internet access, legal, and medical services are often excluded from the state sales tax
base.13 In many states, groceries are also exempt from the sales tax or taxed at a
lower rate (see Table 1). A true consumption tax would include all income that is not
saved, including personal expenditures on services.14
12Tax evasion is illegal, whereas tax avoidance, where individuals change their behavior to
reduce their tax burden, is legal. For example, moving to a state with no personal income tax,
such as Florida, Maine, or Texas, is legal state income tax avoidance. A Florida resident not
paying the Florida use tax on an out-of-state purchase is tax evasion.
13For example, only two states tax medical services, Hawaii and New Mexico.
14A common identity in the economics of income accounting is the following: C=Y-S. Or,
consumption (C) equals income (Y) less saving (S).

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CRS-4
Business-to-business transactions are often exempt from the retail sales tax,
particularly in cases where the purchaser is using the good as an input to production.
These transactions are exempt because including the transactions could lead to the
“pyramiding” of the sales tax. For example, if a coffee shop were to pay a retail sales
tax on the purchase of coffee, and then impose a retail sales tax on coffee brewed for
the final consumer, the total sales tax paid for the cup of coffee would likely exceed
the statutory rate. Products that a business purchases for resale are typically not
assessed a retail sales tax for a similar reason. If a coffee shop buys beans only for
resale, levying a sales tax on the wholesale purchase of the beans and then on the
retail sale would more than double the statutory rate. Tax treatment of business to
business transactions is not uniform across states and would likely require some
standardization as part of any simplification plan.
Many individuals and organizations are also exempt from state sales taxes.
Entities wishing to claim the sales tax exemption are often issued a certificate
indicating their tax-free status and are required to present this certification at the point
of transaction. Non-profit organizations, such as those whose mission is religious,
charitable, educational, or to promote the public health, often hold sales tax-exempt
status. Each state has a different list of exempt entities.
Tax Rate. The second component of a sales tax is the tax rate applied to the
base described in the previous section. In 32 states, local governments piggy-back a
local sales tax (which often varies among localities) on the state sales tax; another 13
states and the District of Columbia levy a single state rate (see Table 2) with no local
taxes. Some states in the group of 32 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 do not differentiate between
the state and local share. For example, vendors in Virginia levy a 4.5% 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 county where the tax was collected. The
state of Virginia keeps the remaining 3.5%.
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 and Rhode Island have the
highest state sales tax rate of 7%. However, Oklahoma has the highest potential
combined state and local rate of 9.75%. Residents in high sales tax rate jurisdictions
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.15 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.
15For example, see: Susanne Pagano, “DOR Working to Educate Purchasers About Taxes
Due on Remote Purchases,” Daily Tax Report, Dec. 5, 2001, p. H-4.

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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 the states 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.16 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.17
Simplifying or standardizing the sales tax begins with implementing uniform base
definitions. The second step would require agreement between a state and its local
governments on the appropriate rate. Some have suggested a blended rate, such as
an average of all local rates added to the state rate, instead of the existing state rate.
It is uncertain how state and local governments with different rates will reconcile their
different rates.
Internet Taxes: Economic Issues
During the debate about “Internet taxes,” some economic issues will be
important to consider. Questions such as: 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? What will the potential revenue loss be absent changes in the treatment of
Internet transactions? Following below is a brief review of some of those issues.
Efficiency. A commonly held view among economists is that a “good” tax (or
more precisely, an efficient tax) is one that does not significantly distort consumer
behavior. Broadly speaking, individuals should make the same choices before and
after a tax is imposed. The greater the distortions in behavior caused by a tax, the
greater the economic welfare loss. A sales tax levied on all consumer expenditures
equally would satisfy this definition of efficiency. However, as noted earlier, under
the current state sales tax system, all consumption expenditures are not treated
equally. The growth of tax-free Internet transactions will likely amplify the efficiency
losses from altered consumer behavior.
An alternative theory for sales taxation is referred to as “optimal commodity
taxation.” Under an optimal commodity tax, the tax rate should be based on (or
determined by) the price elasticity of demand for the product (sometimes called the
“Ramsey Rule”). Conversely, products that are price inelastic, meaning quantity
demanded is insensitive to changes in price, should be levied a higher rate of tax.
16The 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.
17Under 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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Products that are price elastic, should have a lower rate of tax. If products purchased
over the Internet are relatively more price elastic, then the lower tax rate created by
effectively tax-free Internet transactions may improve economic efficiency. However,
the price elasticity of products available over the Internet is difficult to measure and
the efficiency gain, if any, would be small.18
An additional economic inefficiency would arise if vendors incur higher
transportation costs to avoid collection of the sales tax. Consumers may pay higher
transportation costs instead of financing government expenditures through the sales
tax. In the long run, it is conceivable that the higher transportation costs would
erode the advantage of evading the sales tax.
For example, consider a consumer who lives in Virginia and wants to buy a set
of woodworking chisels.19 The local Virginia hardware store sells the set for $50
(including profit). An Internet savvy hardware store in Georgia is willing to sell the
same chisel set for $52 inclusive of profit and shipping costs. So, before taxes, the
local retailer could offer the chisels at a lower price. The marginal customer, who is
indifferent between the two retailers before taxes, is just as likely to buy from the
Internet retailer as from the local retailer.20
However, the Virginia state and local sales tax of 4.5% yields a final sales price
to the consumer of $52.25. Given the higher relative price inclusive of the tax, the
marginal consumer, along with many other consumers, would likely switch to buying
chisels from the Internet retailer (assuming these consumers do not feel compelled to
pay the required Virginia use tax on the Internet purchase). The diversion from retail
to the Internet in response to the non-collection of the use tax represents a loss in
economic efficiency. The additional $2 in production costs represents the efficiency
loss to society from evading the use tax.21
18Equity has both horizontal and vertical components. A tax is defined as horizontally
equitable if people of equal circumstances pay equal taxes. A tax is defined as vertically
equitable if people with a greater ability to pay carry a greater tax burden than those less able
to pay. An optimal commodity tax would likely violate accepted principles of vertical equity.
19This example is based on one provided in: Dennis Zimmerman, “The Internet Sales Tax
Debate: Sorting Through the Economic Issues,” paper prepared for the 94th Annual
Conference, National Tax Association, Baltimore, MD, Nov. 8-10, 2001.
20The pre-tax price relationship between the two retailers is unimportant . The Internet price
inclusive of shipping could be lower before taxes. The application of the use tax makes the
local retailer’s product relatively more expensive, regardless of what the prices were before
taxes.
21Shipping costs can be thought of as a cost of production. The local retailer probably also
paid shipping costs to have the product on the shelf. Those costs are included in the price of
the good. Because the local retailer likely bought in bulk, the shipping cost per unit would be
considerably lower than the Internet retailer.

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Equity. The sales tax has often been criticized as a regressive tax, or a tax that
disproportionately burdens the poor.22 Assuming Internet shoppers are relatively
better off and do not remit use taxes as prescribed by state law, they can avoid paying
tax on a larger portion of their consumption expenditures than those without Internet
access at home or work.23 Consumers without ready Internet access are not afforded
the same opportunity to “evade” the sales and use tax. In this way, electronic
commerce may actually exacerbate the regressiveness of the sales tax, at least in the
short run. As computers and access to the Internet become more readily available,
the potential inequity arising from this aspect of the “digital divide” could diminish.
Sales Tax Reliance. The growth of Internet based commerce will have the
greatest effect on the states most reliant on the sales and use tax. In addition to
having more revenue at risk, high reliance states also face greater efficiency losses
because of their generally higher tax rates.24 As noted earlier, higher rates drive a
larger wedge between the retail price inclusive of the sales tax and the Internet price
and thus exacerbate the efficiency loss from the sales tax. States with low rates (and
in turn less reliance) would tend to have a smaller wedge between the two modes of
transaction. High rate-high reliance states would tend to recognize the greatest
revenue loss from a ban on the taxation of Internet transactions.
Based upon CRS calculations of sales tax revenue as a portion of total tax
revenue, Washington, Florida, and Tennessee are the states most reliant upon the
sales and use tax.25 In those states, over 57% of total tax revenue is derived from the
sales tax. This result is not surprising: these states do not have a comprehensive
personal income tax. In fact, the top six states in terms of sales tax reliance do not
levy a broad based personal income tax. Ordinal rankings of sales tax reliance appear
in the last column of Table 2. The District of Columbia was given the ranking it
would have received if it were a state. The third column (c) of Table 2 reports the
highest local sales tax rate for those states that levy local sales taxes. State revenue
and reliance rank do not include local sales and use tax revenues.
State Revenue Loss Estimates. Economists Donald Bruce and William
Fox estimated in September 2001 that the “new e-commerce” loss in 2001 was going
to be approximately $7 billion.26 “New e-commerce,” as measured by Bruce and Fox,
22A regressive tax collects a smaller percentage of income as income increases. Economists
will usually avoid normative question of what is equitable because such a statement implies
an interpersonal comparison of utility.
23Goolsbee and Zittrain (1999) found that the average Internet user had on average two more
years of education and $22,000 more in family income than non-Internet users.
24The top 10 states in the CRS calculated reliance index have an average state sales tax rate
of 5.685%, and the bottom 10 states with a sales tax have an average sales tax rate of
4.365%.
25In addition, those three states were well above the average state tax rate in the U.S. of just
over 5.1% (of the 45 states with a state sales tax and the District of Columbia). The state tax
rates for those three states were: Washington, 6.5%; Florida, 6%; and Tennessee, 6%.
26Donald Bruce and William F. Fox, “State and Local Sales Tax Revenue Losses from E-
(continued...)

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is the lost revenue from states not collecting the use tax on remote Internet
transactions. This estimate excludes purchases made over the telephone or through
catalogs that would have occurred anyway. An earlier General Accounting Office
(GAO) report estimated that the revenue loss in 2003 from internet sales would be
between $1.0 billion and $12.4 billion.27 The wide range of the GAO estimate reflects
the degree of uncertainty on the size of the potential state and local revenue loss from
e-commerce.
Policy Options
Congress can play a passive or active role in the Internet tax debate. A passive
approach would allow the newly extended moratorium to expire on November 1,
2003 without any additional legislation that directly affects Internet taxes. Some may
also consider congressional inaction on the use tax collection issue as part of a passive
agenda. An active role would likely involve new limits on the ability of state and local
governments to levy taxes on Internet access and on transactions conducted over the
Internet. The course of congressional action (or inaction) will likely occur before the
moratorium extension expires in November 2003. This section explores some
possible outcomes and consequences of the two alternatives.
Passive Approach. This approach, allowing the moratorium to expire and
inaction on the use tax collection issue, would implicitly maintain the current
limitations on the states’ ability to require remote vendors to collect sales and use
taxes. Some observers believe that this course of inaction would ultimately lead states
to abandon the sales tax because untaxed Internet transactions would, over time,
significantly erode the revenue base. Even though some base erosion is likely, the
ultimate size of the potential revenue loss is highly speculative. Nevertheless, revenue
uncertainty is unwelcome to state officials who must balance their operating budgets
annually. Uncertain revenue streams are particularly troubling for state budget
officials because, unlike the federal government, states face state constitutional (or
legislated) restrictions on the use of debt and on the total amount of debt outstanding.
Thus funding temporary shortfalls with borrowing is more difficult for state and local
governments than for the federal government.
Advocates of the passive approach suggest that a lower tax burden on Internet
transactions would help small Internet retailers compete with larger, established retail
entities. While a relatively lower tax burden would clearly help Internet vendors in
the short run, direct payments to Internet vendors would seem to be a more
transparent means of delivering a subsidy.
Opponents of congressional passivity on the sales and use tax collection issue
focus on the negative impact state revenue losses may have on the states if Congress
26(...continued)
Commerce: Updated Estimates,” University of Tennessee Center for Business and Economic
Research, Sept. 2001, p.1.
27U.S. General Accounting Office, Sales Taxes: Electronic Commerce Growth Presents
Challenges; Revenue Losses Are Uncertain, GAO Report OCE-00-165 (Washington: June
30, 2000), p. 21.

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CRS-9
does nothing. In addition, some critics of a passive approach believe that anticipated
congressional action provides the impetus for state and local governments to simplify
their sales tax systems.
Active Approach. The active options available to Congress range from (a)
forbidding sub-federal governments from levying taxes on both Internet access and
on transactions conducted over the Internet, regardless of nexus issues to, (b)
requiring remote vendors (those without nexus) to collect and remit use taxes. The
first option (a) is unlikely without an accompanying concession by the federal
government to compensate for the federal mandate. The second option (b) is unlikely
without action by the states and local governments to simplify and harmonize their tax
regimes.28
Both extremes in the active approach have their supporters. However,
proponents closely aligned with the first option, essentially creating an Internet tax-
free zone, seem driven more by reducing taxes generally than by other policy
concerns. Supporters closer to the other activist option are concerned about state
revenue losses as well as the apparent need to reform state and local taxes. These
activists believe the Internet tax debate provides a unique opportunity to simplify and
reform state and local sales taxes.
28For a detailed review of the arguments surrounding the push for simplification, see: Charles
McLure Jr., “SSTP: Out of Great Swamp, But Whither? A Plea to Rationalize the State
Sales Tax,” State Tax Notes, December 31, 2001, p. 1077.

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Table 1. State General Sales and Gross Receipts Taxes as
Percent of Total Personal Income, by State, FY2000
(Local sales and use taxes not included)
GSGR a
GSGR Tax
State
State Tax
as Percent
(italics =no personal
Revenue
Groceries in
State Personal
of Personal
income tax)
2000
State Base
Income 2000
Income
(*=no state sales tax)
($000's)
(in 2001)
($000's)
2000
(a)
(b)
(c)
(d)
(e)
Alabama
1,701,885
Y
104,567,520
1.63%
Alaska *
n/a
n/a
18,611,908
0.00%
Arizona
3,632,686
N
129,132,715
2.81%
Arkansas
1,706,645
Y
58,844,351
2.90%
California
23,457,385
N
1,094,769,896
2.14%
Colorado
1,849,305
N
140,352,701
1.32%
Connecticut
3,419,939
N
139,304,914
2.46%
Delaware *
n/a
n/a
24,441,118
0.00%
District of Columbia b
640,212
N c
21,918,759
2.92%
Florida
15,010,888
N
447,011,972
3.36%
Georgia
4,630,179
N
228,692,342
2.02%
Hawaii
1,536,276
Y
33,775,622
4.55%
Idaho
747,134
Y
30,758,920
2.43%
Illinois
6,393,080
Y d
396,238,894
1.61%
Indiana
3,579,416
N
163,549,354
2.19%
Iowa
1,722,836
N
77,283,220
2.23%
Kansas
1,743,835
Y
73,829,202
2.36%
Kentucky
2,171,609
N
97,444,879
2.23%
Louisiana
2,060,822
Y e
103,111,837
2.00%
Maine
847,358
N c
32,411,818
2.61%
Maryland
2,498,184
N
178,506,406
1.40%
Massachusetts
3,565,267
N
239,738,503
1.49%
Michigan
7,666,399
N
289,389,592
2.65%
Minnesota
3,723,638
N
157,429,716
2.37%
Mississippi
2,333,384
Y
59,467,235
3.92%
Missouri
2,787,531
Y d
152,436,677
1.83%
Montana *
n/a
n/a
20,394,576
0.00%

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CRS-11
GSGR a
GSGR Tax
State
State Tax
as Percent
(italics =no personal
Revenue
Groceries in
State Personal
of Personal
income tax)
2000
State Base
Income 2000
Income
(*=no state sales tax)
($000's)
(in 2001)
($000's)
2000
Nebraska
1,027,940
N
47,422,716
2.17%
Nevada
1,941,674
N
59,639,529
3.26%
New Hampshire f *
n/a
n/a
40,937,513
0.00%
New Jersey
5,508,046
N
312,890,502
1.76%
New Mexico
1,502,319
Y
39,972,781
3.76%
New York
8,563,323
N
655,582,965
1.31%
North Carolina
3,361,189
N
217,011,152
1.55%
North Dakota
330,269
N
15,915,510
2.08%
Ohio
6,263,251
N
317,266,457
1.97%
Oklahoma
1,441,670
Y
81,553,670
1.77%
Oregon *
n/a
n/a
94,999,226
0.00%
Pennsylvania
7,057,309
N
362,989,426
1.94%
Rhode Island
621,066
N
30,599,459
2.03%
South Carolina
2,458,308
Y d
96,411,001
2.55%
South Dakota
487,897
Y
19,659,014
2.48%
Tennessee f
4,446,160
Y
147,751,975
3.01%
Texas
14,012,165
N
580,735,638
2.41%
Utah
1,423,234
Y
52,473,687
2.71%
Vermont
215,423
N
16,410,675
1.31%
Virginia
2,471,938
Y d
220,583,134
1.12%
Washington
7,739,014
N
184,280,313
4.20%
West Virginia
917,050
Y
39,369,502
2.33%
Wisconsin
3,506,696
N
150,866,372
2.32%
Wyoming
368,779
Y g
13,575,136
2.72%
Sources: Columns (b) and (d), U.S. Bureau of Census; column (c), Federation of Tax
Administrators; column (e), author’s calculations.
a. General sales and gross receipts tax (GSGR).
b. General sales and gross receipts data are from the annual report of the District of Columbia
municipal government which is not directly comparable to the other states.
c. Snack food is not exempt.
d. Subject to a reduced rate.
e. Exemption is temporarily suspended.
f. Only capital income included in the personal income tax.
g. Some snack foods are taxable.

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CRS-12
Table 2. Reliance on the Sales and Gross Receipts Tax, by
State, FY2000
(Local sales and use taxes not included)
GSGR
Total State
GSGRa
Tax as
State
Highest
Tax
State Tax
Percent of
Rate
Local
Revenue in
Revenue in
FY2000
State
in
Rate in
FY2000
FY2000
Tax
Reliance
(*=no local tax)
2001
2001
($000's)
($000's)
Revenue
Rank
(a)
(b)
(c)
(d)
(e)
(f)
(g)
Alabama
4
5
6,438,438
1,701,885
26.4%
37
Alaska
n/a
6
1,423,287
0
0.0%
51
Arizona
5.6
3
8,100,737
3,632,686
44.8%
9
Arkansas
5.125
3
4,870,561
1,706,645
35.0%
16
California
6
2.75
83,807,959
23,457,385
28.0%
33
Colorado
2.9
4.5
7,075,047
1,849,305
26.1%
38
Connecticut *
6
0
10,171,242
3,419,939
33.6%
20
Delaware *
n/a
n/a
2,132,131
0
0.0%
51
District of
5.75
n/a
3,029,303
640,212
21.1%
44b
Columbia b
Florida
6
2.5
24,817,263
15,010,888
60.5%
2
Georgia
4
3
13,511,275
4,630,179
34.3%
18
Hawaii *
4
n/a
3,334,743
1,536,276
46.1%
8
Idaho
5
2
2,377,251
747,134
31.4%
26
Illinois
6.25
2.5
22,788,799
6,393,080
28.1%
32
Indiana *
5
0
10,104,353
3,579,416
35.4%
15
Iowa
5
2
5,185,394
1,722,836
33.2%
21
Kansas
4.9
3
4,865,305
1,743,835
35.8%
13
Kentucky *
6
0
7,694,610
2,171,609
28.2%
30
Louisiana
4
5.5
6,512,382
2,060,822
31.6%
25
Maine *
5
0
2,661,080
847,358
31.8%
23
Maryland *
5
0
10,354,447
2,498,184
24.1%
40
Massachusetts *
5
0
16,152,874
3,565,267
22.1%
42
Michigan *
6
0
22,756,403
7,666,399
33.7%
19
Minnesota
6.5
1
13,338,532
3,723,638
27.9%
34
Mississippi *
7
0
4,711,594
2,333,384
49.5%
7
Missouri
4.225
4
8,571,548
2,787,531
32.5%
22
Montana *
n/a
n/a
1,410,760
0
0.0%
51

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CRS-13
GSGR
Total State
GSGRa
Tax as
State
Highest
Tax
State Tax
Percent of
Rate
Local
Revenue in
Revenue in
FY2000
State
in
Rate in
FY2000
FY2000
Tax
Reliance
(*=no local tax)
2001
2001
($000's)
($000's)
Revenue
Rank
Nebraska
5
1.5
2,981,047
1,027,940
34.5%
17
Nevada
6.5
0.75
3,717,255
1,941,674
52.2%
5
New Hampshire *
n/a
n/a
1,696,085
0
0.0%
51
New Jersey *
6
0
18,147,604
5,508,046
30.4%
29
New Mexico
5
2.1875
3,743,178
1,502,319
40.1%
10
New York
4
4.5000
41,735,841
8,563,323
20.5%
43
North Carolina
4
2
15,216,066
3,361,189
22.1%
41
North Dakota
5
2
1,172,373
330,269
28.2%
31
Ohio
5
2
19,676,365
6,263,251
31.8%
24
Oklahoma
4.5
5.25
5,851,814
1,441,670
24.6%
39
Oregon *
n/a
n/a
5,945,675
0
0.0%
51
Pennsylvania
6
1
22,466,906
7,057,309
31.4%
27
Rhode Island *
7
0
2,034,909
621,066
30.5%
28
South Carolina
5
1
6,381,391
2,458,308
38.5%
11
South Dakota
4
2
927,245
487,897
52.6%
4
Tennessee
6
2.75
7,739,590
4,446,160
57.4%
3
Texas
6.25
2
27,424,142
14,012,165
51.1%
6
Utah
4.75
2
3,978,697
1,423,234
35.8%
14
Vermont *
5
0
1,470,828
215,423
14.6%
46
Virginia
3.5
1
12,648,071
2,471,938
19.5%
45
Washington
6.5
2.3
12,567,383
7,739,014
61.6%
1
West Virginia *
6
0
3,343,266
917,050
27.4%
36
Wisconsin
5
0.6
12,643,015
3,506,696
27.7%
35
Wyoming
4
2
963,650
368,779
38.3%
12
Sources: Columns (b) and (c): Federation of Tax Administrators. Columns (d) and (e): Bureau of
Economic Analysis. Column (f) and (g): author’s calculations.
* = State has no local tax.
a. General sales and gross receipts tax (GSGR).
b. General sales and gross receipts data are from the annual report of the District of Columbia
municipal government which is not directly comparable to the other states.
c. In 1999, 97 of 162 municipalities in Alaska levied a sale taxes and 7% was the highest rate of
those 97.

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