.

State Taxation of Internet Transactions
Steven Maguire
Specialist in Public Finance
November 1, 2011
Congressional Research Service
7-5700
www.crs.gov
R41853
CRS Report for Congress
Pr
epared for Members and Committees of Congress
c11173008

---

.
State Taxation of Internet Transactions

Summary
The United States Bureau of the Census estimated that $3.4 trillion worth of retail and wholesale
transactions were conducted over the Internet in 2009. That amount was 16.8% of all U.S.
shipments and sales in that year. Other estimates projected the 2011 so-called e-commerce
volume at approximately $3.9 trillion. The volume of e-commerce is expected to increase and
state and local governments are concerned because collection of sales taxes on these transactions
is difficult to enforce.
Under current law, states cannot reach beyond their borders and compel out-of-state Internet
vendors (those without nexus in the buyer’s state) to collect the use tax owed by state residents
and businesses. The Supreme Court ruled in 1967 that requiring remote vendors to collect the use
tax would pose an undue burden on interstate commerce. Estimates put this lost tax revenue at
approximately $11.4 billion in 2012.
Congress is involved because interstate commerce typically falls under the Commerce Clause of
the Constitution. Opponents of remote vendor sales and use tax collection cite the complexity of
the myriad state and local sales tax systems and the difficulty vendors would have in collecting
and remitting use taxes. Proponents would like Congress to change the law and allow states to
require out-of-state vendors without nexus to collect state use taxes. These proponents
acknowledge that simplification and harmonization of state tax systems are likely prerequisites
for Congress to consider approval of increased collection authority for states.
A number of states have been working together to harmonize sales tax collection and have created
the Streamlined Sales and Use Tax Agreement (SSUTA). The SSUTA member states hope that
Congress can be persuaded to allow them to require out-of-state vendors to collect taxes from
customers in SSUTA member states.
In the 112th Congress, S. 1452 and H.R. 2701 (Senator Durbin and Representative Conyers)
would grant SSUTA member states the authority to compel out-of-state vendors in other member
states to collect sales and use taxes. In addition, H.R. 3179 (Representative Womack) would also
grant states the authority to compel out-of-state vendors to collect use taxes provided selected
simplification efforts are implemented.
A related issue is the “Internet Tax Moratorium.” The relatively narrow moratorium prohibits (1)
new taxes on Internet access services and (2) multiple or discriminatory taxes on Internet
commerce. Congress has extended the “Internet Tax Moratorium” twice. The most recent
extension expires November 1, 2014. The moratorium is distinct from the remote use tax
collection issue, but has been linked in past debates. An analysis of the Internet tax moratorium is
beyond the scope of this report.
This report will be updated as legislative events warrant.

Congressional Research Service

---

.
State Taxation of Internet Transactions

Contents
Introduction...................................................................................................................................... 1
State and Local Sales and Use Taxes ............................................................................................... 2
Components of the Sales and Use Tax ...................................................................................... 2
Tax Base .............................................................................................................................. 2
Tax Rate............................................................................................................................... 4
State Reliance on Sales Taxes.................................................................................................... 7
Description of the SSUTA ............................................................................................................... 9
State Level Administration ........................................................................................................ 9
Uniform Tax Base.................................................................................................................... 10
Simplified Tax Rates ............................................................................................................... 11
Standard Rate Sourcing Rules for Cross-Jurisdictional Sales ................................................. 11
SSUTA Stakeholders ............................................................................................................... 11
Congressional and State Legislative Activity ................................................................................ 12
SSUTA Legislation.................................................................................................................. 12
Other Remote Seller Sales Tax Collection Legislation ........................................................... 13
Amazon Laws.......................................................................................................................... 14
Economic Issues ............................................................................................................................ 14
Efficiency ................................................................................................................................ 15
Equity ...................................................................................................................................... 16
Differential Effect Among States............................................................................................. 16
Revenue Loss Estimates .......................................................................................................... 16

Tables
Table 1. State and Local Sales Taxes as Percentage of Total Personal Income, 2008 ..................... 3
Table 2. SSUTA Status and State and Local Sales Tax Rates .......................................................... 5
Table 3. State and Local Government Sales Tax Reliance............................................................... 7

Contacts
Author Contact Information........................................................................................................... 17

Congressional Research Service

---

.
State Taxation of Internet Transactions

Introduction
State governments rely on general sales and use taxes for just under one-third (30.8%) of their
total tax revenue—approximately $241 billion in FY2008. Local governments derive 11.6% of
their tax revenue—approximately $63 billion in FY2008—from general sales and use taxes. Both
state and local sales taxes are usually collected by vendors at the point of transaction and levied
as a percentage of a product’s retail price. Alternatively, use taxes, levied at the same rate, are
often not collected by the vendor if the vendor does 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 for the use of the product purchased. Compliance with this requirement, however, is
quite low.
State and local governments are concerned that the expansion of e-commerce, which is estimated
to reach approximately $3.9 trillion in 2011, is gradually eroding their tax base.1 This concern
arises in part because the U.S. Supreme Court ruled out-of-state vendors are not required to
collect sales taxes for states in which they (the vendors) do not have nexus. In hopes of stemming
the potential loss of tax revenue, several states are participating in an initiative to simplify and
coordinate their tax codes—called the Streamlined Sales and Use Tax Agreement (SSUTA). The
member states hope that Congress could be persuaded to allow them to require out-of-state
vendors to collect taxes from resident customers.
Congress has a role in this issue because interstate commerce, in most cases, falls under the
Commerce Clause of the Constitution. Congress will likely be asked to choose between taking
either an active or passive role in the debate. In the 112th Congress, S. 1452 and H.R. 2701
(Senator Durbin and Representative Conyers) would grant SSUTA member states the authority to
compel out-of-state vendors in other member states to collect sales and use taxes. On the House
side, H.R. 3179 (Representative Womack) would also grant states the authority to compel out-of-
state vendors to collect use taxes provided selected simplification efforts are implemented.
In the 111th Congress, H.R. 5660 (former Representative Delahunt) would have granted SSUTA
member states the authority to compel out-of-state vendors to collect sales and use taxes. A more
passive approach by Congress could involve states implementing the SSUTA without
congressional approval. State enforcement of remote collection would likely face legal
challenges, and the outcome of these legal challenges is uncertain. This report intends to clarify
significant issues in the remote sales tax collection debate, beginning with a description of state
and local sales and use taxes.
The impact of congressional action (or inaction) on the remote collection issue will vary
significantly by state. For this reason, the report includes a state-by-state analysis of the sales tax.

1 Donald Bruce, William F. Fox, LeAnn Luna, “State and Local Government Sales Tax Revenue Losses From
Electronic Commerce,” State Tax Notes, 52(7):537-558, May 18, 2009, p. 7. Version available at University of
Tennessee Center for Business and Economic Research, http://cber.bus.utk.edu/ecomm.htm.
Congressional Research Service
1

---

.
State Taxation of Internet Transactions

State and Local Sales and Use Taxes
In 1932, Mississippi was the first state to impose a general state sales tax. During the remainder
of the 1930s, an era characterized by declining revenue from corporate and individual income
taxes, 23 other states followed suit and implemented a general sales tax. At the time, the sales tax
was relatively easy to administer and raised a significant amount of revenue despite a relatively
low rate. 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.
Components of the Sales and Use Tax
The revenue generated by a sales and use tax, assuming a given level of compliance, depends on
the base of the tax and the tax rate. 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. The SSUTA is intended to provide uniform definitions
across states for items included in the base and the applicable tax rates. Following is an analysis
of the variation of these components across the states.
Tax Base
The sales tax is perhaps better identified as a transaction tax on the transfer of tangible personal
property, as expenditures on most services are typically excluded from the state sales tax base. In
addition, in most states (34) and the District of Columbia, groceries are also exempt from state
and local sales taxes or taxed at a lower rate.2
Table 1 presents the most recently available data on state and local tax revenue and an estimate of
each state’s sales tax base. The sales tax revenue includes collections from individuals as well as
businesses. The estimate of the sales tax base as a share of income is a rough approximation of
the state sales tax base.3 A higher percentage likely indicates (1) a greater number of items and
services subject to the sales and (2) greater compliance. In the case of Hawaii, where over 100%
of personal income is includable in the tax base, the percentage likely measures some degree of
pyramiding of the sales tax. Pyramiding occurs when a business pays sales tax on a good then
collects more sales tax when the good is sold. Pyramiding is common in many other states, but is
difficult to quantify. In total, roughly half of personal income is spent on items subject to the sales
taxes.

2 Federation of Tax Administrators, State Sales Tax Rates and Food and Drug Exemptions, January 1, 2011, available
at http://www.taxadmin.org/fta/rate/sales.pdf. In three additional states, groceries are subject to local sales taxes only.
3 A common identity in economics is: income = consumption + saving. The sales tax is a tax on consumption.
Congressional Research Service
2

---

.
State Taxation of Internet Transactions

Table 1. State and Local Sales Taxes as Percentage of Total Personal Income, 2008
(amounts in thousands; tax data are FY2008)
Total State
Sales Tax
and Local
State Sales
Local Sales
Base as
Sales Taxes
Taxes
Taxes
State Personal
Share of
State
FY2008
FY2008
FY2008
Income 2008
Incomea
United
States $304,434,833 $241,007,659 $63,427,174 $12,380,225,000
49.5%
Alabama 4,148,232
2,287,288
1,860,944
158,696,556
43.2%
Alaska
214,647 — 214,647
30,562,542 —
Arizona 9,108,974
6,433,468
2,675,506
223,961,131
47.3%
Arkansas 3,715,891
2,807,943
907,948
93,480,735
63.2%
California
41,089,543 31,972,874 9,116,669 1,604,154,823 39.4%
Colorado 5,259,552
2,312,731
2,946,821
214,976,720
44.6%
Connecticut 3,545,734 3,545,734 — 200,363,527 40.9%
Delaware — — —
35,614,625
—
Florida
22,852,595 21,518,100 1,334,495 739,403,128
55.7%
Georgia 9,770,932
5,796,653
3,974,279
342,934,981
51.7%
Hawai 2,619,595
2,619,595
—
54,700,256
101.3%
Idaho 1,347,452
1,347,327
125
50,501,995
50.4%
Illinois 9,309,321
7,935,417
1,373,904
554,795,334 31.8%
Indiana 5,738,829
5,738,829
—
223,683,334
44.2%
Iowa 2,431,216
1,840,862
590,354
114,428,772
44.5%
Kansas 3,059,541
2,264,747
794,794
111,957,460
50.2%
Kentucky 2,875,836
2,875,836 — 138,485,619
46.1%
Louisiana 7,107,737
3,459,383
3,648,354
169,791,033
63.6%
Maine 1,060,557
1,060,557
—
48,296,992
48.4%
Maryland 3,748,933
3,748,933
— 274,285,685
34.7%
Massachusetts 4,098,089 4,098,089
—
333,814,725 29.3%
Michigan 8,225,599
8,225,599
—
353,140,341
50.1%
Minnesota 4,668,525
4,550,838
117,687
226,148,739
43.5%
Mississippi 3,135,390
3,135,390 — 90,346,843 55.6%
Missouri 5,055,423
3,228,274
1,827,149
219,694,892
46.8%
Montana — —
—
34,140,823
—
Nebraska 1,875,530
1,534,134
341,396
71,567,563
44.4%
Nevada
3,373,043 3,077,433 295,610 104,729,983 57.0%
New Hampshireb
— — —
57,793,463
—
New Jersey
8,915,515
8,915,515
—
447,988,666
28.8%
New Mexico
2,765,950
1,949,768
816,182
66,773,297
89.3%
New York
23,032,617
11,294,737
11,737,880
937,173,182
34.4%
Congressional Research Service
3

---

.
State Taxation of Internet Transactions

Total State
Sales Tax
and Local
State Sales
Local Sales
Base as
Sales Taxes
Taxes
Taxes
State Personal
Share of
State
FY2008
FY2008
FY2008
Income 2008
Incomea
North Carolina
7,225,971
5,269,929
1,956,042
329,969,962
44.9%
North Dakota
622,166
530,078
92,088
26,591,382
52.9%
Ohio 9,523,835
7,865,674
1,658,161
414,458,285
39.1%
Oklahoma 3,611,865
2,096,220
1,515,645
134,504,737
67.4%
Oregon —
—
—
139,306,268
—
Pennsylvania 9,190,350 8,873,309 317,041
508,248,855 32.6%
Rhode Island
846,870
846,870
—
44,060,770
28.2%
South Carolina
3,174,420
3,051,608
122,812
148,891,535
53.1%
South Dakota
1,003,308 732,438 270,870
31,710,437 68.8%
Tennesseeb
8,793,990 6,832,948 1,961,042 219,160,305 52.3%
Texas
27,076,344 21,668,972 5,407,372 968,231,053
48.5%
Utah 2,612,849
1,964,119
648,730
88,792,239
60.7%
Vermont 344,402
338,941
5,461
24,459,780
40.3%
Virginia 4,736,329
3,656,789
1,079,540
348,265,469
42.3%
Washington
13,732,876 11,344,622 2,388,254 287,010,560
48.0%
West Virginia
1,109,822
1,109,822
—
57,207,827
48.5%
Wisconsin 4,567,730
4,268,068
299,662
213,316,800
46.3%
Wyoming
1,216,295 981,198 235,097
27,016,369 75.1%
Source: U.S. Bureau of Census, State and Local Government Finances by Level of Government and by State:
2007-08, available at http://www.census.gov/govs/estimate/.
Notes: States in italics are states without a broad based income tax.
a. Mikesell, John, “Retail Sales Taxes, 1995-98: An Era Ends,” State Tax Notes, February 21, 2000, p. 594. Data
are for the 1998 tax year, the latest year for which estimates of sales tax base were made.
b. New Hampshire and Tennessee levy a tax on income from dividends and interest.
Tax Rate
The second component of a sales tax is the tax rate applied to the base. In 34 states, local
governments piggy-back 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 34 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 returns what would have been raised by a 1.0% tax back to the local
jurisdiction where the tax was collected. The state of Virginia keeps the remaining 4.0%.
As of January 1, 2011, California had the highest state sales tax rate of 7.25%. Indiana,
Mississippi, New Jersey, Rhode Island, and Tennessee had state sales tax rate of 7.0%. The state
Congressional Research Service
4

---

.
State Taxation of Internet Transactions

rate is only part of the total rate; as noted earlier, most states also levy a local sales tax. As of
January 1, 2011, Arizona had the highest potential combined state and local rate of 12.1%, with
Alabama second at 12.0%.
Residents in high sales tax rate jurisdictions could benefit more from Internet purchases (and tax
evasion) relative to those in low tax rate states. Recognizing this potential revenue loss, many
high-rate states have stepped up efforts to inform consumers of their responsibility to pay use
taxes on Internet and mail-order catalog purchases. 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.
The tax base and tax rate determine how much revenue is generated by the sales tax for each
jurisdiction. The share lost to non-compliance arising from e-commerce, however, varies
considerably by state. Part of the variance can be attributed to the two components of the overall
compliance: sales tax collected by vendors and use tax remitted by purchasers. Researchers on e-
commerce estimated a relatively high vendor compliance though considerably lower purchaser
compliance.4
Table 2 also lists each state’s current status with the SSUTA. The “member” states (20) have all
enacted laws that fully comply with the SSUTA. A second group of states (4) are considered
“associate” states and not full members because relatively small technical changes are needed in
state tax laws to be in full compliance with SSUTA. A third group of states (19) are participating
in the streamlining effort but have not made the necessary uniformity changes in state sales tax
law to be considered for member or associate status.
Table 2. SSUTA Status and State and Local Sales Tax Rates
SSUTA
State Tax
Top Local
Maximum
State
Statusa
Rateb
Rateb
Combined
Rank
United States Average
—
5.047%
2.547%
7.594%
—
Alabama Advisory
4.000%
8.000%
12.000%
2
Alaska
No Sales Tax
—
7.500%
7.500%
28
Arizona Advisory
6.600%
5.500%
12.100%
1
Arkansas Member
6.000%
5.500%
11.500%
3
California Advisory
8.250%
3.000%
11.250%
5
Colorado Non-Participant
2.900%
7.000%
9.900%
12
Connecticut Advisory
6.000%
—
6.000%
38
Delaware
No Sales Tax
—
—
—
47
Florida Advisory
6.000%
1.500%
7.500%
28
Georgia Associate
4.000%
4.000%
8.000%
21

4 Bruce, Donald, William F. Fox, LeAnn Luna, “State and Local Government Sales Tax Revenue Losses From
Electronic Commerce,” State Tax Notes, 52(7):537-558, May 18, 2009. Version available at University of Tennessee
Center for Business and Economic Research, http://cber.bus.utk.edu/ecomm.htm.
Congressional Research Service
5

---

.
State Taxation of Internet Transactions

SSUTA
State Tax
Top Local
Maximum
State
Statusa
Rateb
Rateb
Combined Rank
Hawai Advisory
4.000%
0.500%
4.500%
46
Idaho Not
Advisory
6.000%
3.000%
9.000%
15
Illinois Advisory
6.250%
4.250%
10.500%
10
Indiana Member
7.000%
—
7.000%
32
Iowa Member
6.000%
2.000%
8.000%
21
Kansas Member
6.300%
5.000%
11.300%
4
Kentucky Member
6.000%
—
6.000%
38
Louisiana Advisory
4.000%
6.750%
10.750%
8
Maine Advisory
5.000%
—
5.000%
44
Maryland Advisory
6.000%
—
6.000%
38
Massachusetts Advisory
6.250% — 6.250%
37
Michigan Member
6.000%
—
6.000%
38
Minnesota Member
6.875%
1.000%
7.875%
25
Mississippi Advisory
7.000%
0.250%
7.250%
31
Missouri Advisory
4.225%
6.625%
10.850%
6
Montana
No Sales Tax
—
—
—
47
Nebraska Member
5.500%
2.000%
7.500%
28
Nevada Member
6.850%
1.250%
8.100%
20
New Hampshire
No Sales Tax
—
—
—
47
New Jersey
Member
7.000%
—
7.000%
32
New Mexico
Advisory
5.125%
5.625%
10.750%
9
New York
Advisory
4.000%
5.000%
9.000%
15
North Carolina
Member
5.750%
3.000%
8.750%
18
North Dakota
Member
5.000%
2.500%
7.500%
27
Ohio Associate
5.500%
2.250%
7.750%
26
Oklahoma Member
4.500%
6.350%
10.850%
7
Oregon
No Sales Tax
—
—
—
47
Pennsylvania Not
Advisory
6.000%
2.000%
8.000%
21
Rhode Island
Member
7.000%
0.000%
7.000%
32
South Carolina
Advisory
6.000%
3.000%
9.000%
15
South Dakota
Member
4.000%
2.000%
6.000%
38
Tennessee Associate
7.000%
2.750%
9.750%
13
Texas Advisory
6.250%
2.000%
8.250%
19
Utah Associate
4.700%
5.250%
9.950%
11
Vermont Member
6.000%
1.000%
7.000%
35
Virginia Advisory
4.000%
1.000%
5.000%
44
Congressional Research Service
6

---

.
State Taxation of Internet Transactions

SSUTA
State Tax
Top Local
Maximum
State
Statusa
Rateb
Rateb
Combined Rank
Washington Member
6.500%
3.000%
9.500%
14
West Virginia
Member
6.000%
—
6.000%
38
Wisconsin Member
5.000%
1.500%
6.500%
36
Wyoming Member
4.000%
4.000%
8.000%
21
Source: State and local sales tax rate data are from the Sales Tax Institute at http://www.salestaxinstitute.com/
resources/rates. The highest combined rate and accompanying rank is a CRS calculation.
Notes: “Member” means ful participant in SSUTA; “Associate” generally means technical changes need in state
tax laws for state full conformity; “Advisory” means not conforming to SSTUA; “Not Advisory” means part of
the project, but not advising decisions; and “Non-participating” means state is not working with other states
toward conformity.
a. Status is as of January 1, 2011.
b. State and local sales tax rate data are as of May 1, 2011.
State Reliance on Sales Taxes
In addition to a sales tax, most states levy income taxes and almost every local jurisdiction (and
some states) also levies a property tax. Table 3 presents the relative reliance of each state and
local government combined on the three principal revenue sources: sales taxes, income taxes, and
property taxes. Reliance is measured as a percentage of total taxes collected. Other taxes include
selective sales taxes such as motor fuels taxes, alcoholic beverages taxes, tobacco product taxes,
and corporate income taxes.
The U.S. average reliance is greatest for the property tax at 30.8%, and the sales tax and
individual income tax each accounted for 22.9% of tax revenue in FY2008. The top three states in
sales tax reliance were Washington, Tennessee, and South Dakota. These three states do not levy
a broad based income tax, thus increasing their reliance on sales taxes.5
Table 3. State and Local Government Sales Tax Reliance
(FY2008)
Sales Tax
Reliance
General
Income
Property
Other
State Total
Taxes
Rank
Sales Tax
Tax
Tax
Taxes
United States
$ 1,330,411,772

22.9%
22.9%
30.8%
23.4%
Alabama 14,040,755
14
29.5%
22.7%
16.4%
31.3%
Alaska 9,735,074
47
2.2%
0.0%
11.0%
86.8%
Arizona 22,992,377
4
39.6%
14.8%
29.2%
16.4%
Arkansas 9,405,740
6
39.5%
24.9%
15.5%
20.0%
California 186,014,884
25
22.1%
30.0%
28.4%
19.6%
Colorado 19,636,243
19
26.8%
25.8%
31.2%
16.2%

5 New Hampshire and Tennessee levy a tax on income from dividends and interest.
Congressional Research Service
7

---

.
State Taxation of Internet Transactions

Sales Tax
Reliance
General
Income
Property
Other
State Total
Taxes
Rank
Sales Tax
Tax
Tax
Taxes
Connecticut 23,115,325
42
15.3%
32.5%
36.0%
16.2%
Delaware 3,712,421
48
0.0%
28.7%
16.3%
55.1%
District of Columbia
5,397,980
40
16.6%
25.1%
32.0%
26.3%
Florida 73,351,398
13
31.2%
0.0%
41.3%
27.6%
Georgia 33,632,501
16
29.1%
26.3%
30.4%
14.3%
Hawai 6,736,782
7
38.9%
22.9%
18.6%
19.6%
Idaho 4,939,722
18
27.3%
29.1%
23.9%
19.7%
Illinois 57,834,014
41
16.1%
17.8%
36.8%
29.2%
Indiana 22,954,400
22
25.0%
23.5%
30.2%
21.3%
Iowa 11,541,176
28
21.1%
25.4%
32.2%
21.3%
Kansas 11,877,315
20
25.8%
24.8%
31.0%
18.4%
Kentucky 14,156,697
30
20.3%
32.0%
19.6%
28.0%
Louisiana 17,950,501
5
39.6%
17.7%
15.8%
26.9%
Maine 5,932,772
34
17.9%
26.3%
36.4%
19.4%
Maryland 27,651,053
44
13.6%
40.4%
23.9%
22.1%
Massachusetts 33,997,340
45
12.1%
36.8%
34.3%
16.9%
Michigan 37,649,871
26
21.8%
20.3%
37.5%
20.3%
Minnesota 24,723,888
32
18.9%
31.5%
26.8%
22.8%
Mississippi 9,212,798
9
34.0%
16.8%
25.0%
24.2%
Missouri 19,872,542
21
25.4%
27.5%
27.6%
19.4%
Montana 3,448,016
48
0.0%
25.2%
34.1%
40.7%
Nebraska 7,508,042
23
25.0%
23.0%
33.1%
18.9%
Nevada 10,587,743
11
31.9%
0.0%
30.4%
37.8%
New Hampshire
4,962,804
48
0.0%
2.4%
61.6%
36.0%
New Jersey
53,790,897
39
16.6%
23.4%
42.2%
17.8%
New Mexico
7,746,740
8
35.7%
15.7%
14.5%
34.1%
New York
138,287,941
38
16.7%
33.6%
28.3%
21.5%
North Carolina
33,207,939
27
21.8%
33.1%
23.7%
21.4%
North Dakota
3,174,007
31
19.6%
10.0%
23.3%
47.1%
Ohio 46,660,185
29
20.4%
30.0%
29.1%
20.5%
Oklahoma 12,314,542
15
29.3%
22.6%
17.2%
30.9%
Oregon 12,531,550
48
0.0%
39.7%
34.0%
26.3%
Pennsylvania 54,109,616
37
17.0%
26.5%
28.7%
27.8%
Rhode Island
4,873,788
35
17.4%
22.4%
42.3%
17.9%
South Carolina
13,162,705
24
24.1%
21.8%
32.7%
21.5%
South Dakota
2,499,901
3
40.1%
0.0%
34.3%
25.5%
Congressional Research Service
8

---

.
State Taxation of Internet Transactions

Sales Tax
Reliance
General
Income
Property
Other
State Total
Taxes
Rank
Sales Tax
Tax
Tax
Taxes
Tennessee 18,999,627
2
46.3%
1.5%
24.6%
27.6%
Texas 86,382,692
12
31.3%
0.0%
38.8%
29.8%
Utah 9,371,460
17
27.9%
27.7%
23.7%
20.8%
Vermont 2,935,601
46
11.7%
21.2%
40.1%
26.9%
Virginia 32,706,639
43
14.5%
30.9%
32.3%
22.3%
Washington 28,589,571
1
48.0%
0.0%
27.3%
24.7%
West Virginia
6,428,072
36
17.3%
23.6%
19.3%
39.9%
Wisconsin 24,372,341
33
18.7%
27.2%
36.2%
17.8%
Wyoming 3,693,784
10
32.9%
0.0%
34.1%
33.0%
Source: CRS calculations based on U.S. Bureau of Census, State and Local Government Finances by Level of
Government and by State: 2007-08, available at http://www.census.gov/govs/estimate/.
Note: New Hampshire and Tennessee levy a tax on income from dividends and interest.
Description of the SSUTA
The entity that drafted the original Streamline Sales and Use Tax Agreement (SSUTA), the
Streamlined Sales and Use Tax Project (SSTP), was created in 2000 by 43 states and the District
of Columbia. These states and the District of Columbia wanted to simplify and better synchronize
individual state sales and use tax laws. Its stated goal was to create a simplified sales tax system
so all types of vendors—from traditional retailers to those conducting trade over the Internet—
could easily collect and remit sales taxes. The member states believe that a simplified, relatively
uniform tax code across states would make it easier for remote vendors to collect sales taxes on
goods sold to out-of-state customers. The SSTP was dissolved once the SSUTA became effective
on October 1, 2005. The latest amendments to the SSUTA were approved May 19, 2011.6
The SSUTA agreement explicitly identifies 10 points of focus.7 Uniformity and simplification are
the primary themes with state level administration of the sales and use tax a critical element in
achieving the “streamlining” goal. The 10 points of focus can be condensed into four general
requirements for simplification: (1) state level administration, (2) uniform tax base, (3) simplified
tax rates, and (4) uniform sales sourcing rules. Each is discussed in more detail in the following
sections.
State Level Administration
Administration of the sales tax for multistate businesses is complicated because state sales tax
laws are not uniform.8 Currently, multistate businesses file sales tax returns for each jurisdiction

6 For the latest update, see http://www.streamlinedsalestax.org.
7 SSUTA, Section 102: Fundamental Purpose, p. 7.
8 For a discussion of the theoretical deficiencies U.S. sales and use tax administration, see Walter Hellerstein and
Charles E. McLure Jr., “Sales Taxation of Electronic Commerce: What John Due Knew All Along,” State Tax Notes,
(continued...)
Congressional Research Service
9

---

.
State Taxation of Internet Transactions

in which they are required to remit sales taxes. These state sales and use tax compliance rules are
far from uniform, which increases compliance costs and the accompanying economic
inefficiencies.
Under SSUTA, sales taxes would be remitted to a single state agency and businesses will no
longer file tax returns with each state (and sometimes local jurisdiction) where they conduct
business. States would bear some of the administrative cost of the technology employed to
implement the new system.
States also would incur some additional administrative costs through vendor collection incentives.
State and local governments currently compensate vendors for collection under a variety of rules
and rates. Total vendor compensation would be somewhat standardized under SSUTA with three
uniform brackets with rates set by each member state. SSUTA would require that rates decline as
a business’s tax collection volume increases. Total compensation for vendors in member states
that require tax reporting by local jurisdiction is at least 0.75% of state and local sales and use tax
collections. Total compensation for vendors in member states that do not require tax reporting by
local jurisdiction is a minimum of 0.5% of sales and use tax collections.
As of this writing, 20 states were in full compliance with the terms of the SSUTA and are
identified as “members.” Another four states are “associate members.” Only the member states
will have taxes collected by remote vendors. Table 2 lists the status of SSUTA adoption in each
state.
Uniform Tax Base
As noted earlier, each state has established rules for what to include in the sales tax base, and
definitions of these items are not uniform across states. The SSUTA includes a section requiring
that within each state, all jurisdictions use the same tax base.9 Thus, if the state excludes groceries
from the sales tax, all local governments within the state must also exclude groceries. This
seemingly straightforward requirement can become complicated. For example, as noted above,
groceries are exempt from taxation in most states, whereas candy is taxable in several states. A
common definition of candy (or food) must be agreed upon to implement a streamlined sales tax
regime. Under SSUTA,
“Candy” means a preparation of sugar, honey, or other natural or artificial sweeteners in
combination with chocolate, fruits, nuts or other ingredients or flavorings in the form of bars,
drops, or pieces. “Candy” shall not include any preparation containing flour and shall require
no refrigeration.
Each state would retain the choice over whether the item is taxable (in the base) and the rate that
applies to the product.

(...continued)
January 1, 2001, pp. 41-46.
9 Streamlined Sales Tax Project, SSUTA, p. 13.
Congressional Research Service
10

---

.
State Taxation of Internet Transactions

Simplified Tax Rates
In many states, local jurisdictions tax goods at different rates. This complication is mostly
remedied under the SSUTA, as each state would be permitted only one state tax rate (with an
exception for a second state rate on food and drugs). Each state can add one additional local
jurisdiction rate, based on ZIP code. The member state must maintain a catalogue of rates for all
ZIP codes. For ZIP codes with multiple rates, an average rate for that ZIP code would apply.
Standard Rate Sourcing Rules for Cross-Jurisdictional Sales
Sourcing rules for sales within a member state between local jurisdictions, the vendor would
collect the sales tax at the rate applicable for the vendor location. This is identified as “origin”
sourcing. For sales into a member state from an out-of-state vendor, the vendor levies a tax at the
agreed upon statewide rate applicable in the destination state. This is identified as “destination”
sourcing and is the general rule under the SSUTA.
There is some debate about the “sourcing” aspect of the SSUTA. The single statewide rate, which
is set by each member state, would be a combined state and local rate. If the combined statewide
rate is the state rate plus an average of local rates, it is possible that some consumers will pay a
higher combined tax rate than is required. It has been proposed that the member states would be
required to include a provision in the implementing legislation that would allow consumers that
“overpay” to receive a credit for overpayments.
SSUTA Stakeholders
The SSUTA enjoys the support of the National Governors Association (NGA). The NGA has
endorsed the SSUTA with hopes that the agreement will address the Supreme Court’s concerns
about the burden on interstate commerce of collecting remote taxes. The association believes that
requiring remote vendors to collect sales and use taxes under a new, simplified system will
survive legal challenges. The official statement of the NGA position on the efforts to streamline
state and local taxes begins with the following:
The National Governors Association supports state efforts to pursue, through negotiations,
the courts, and federal legislation, provisions that would require remote, out-of-state vendors
to collect sales and use taxes from their customers. Such action is necessary to restore
fairness between local retail store purchases and remote sellers and to provide a means for
the states to collect taxes that are owed under existing law. The rapid growth of the Internet
and electronic commerce underscores the importance of maintaining equitable treatment
among all sellers.10
The NGA support is shared by other state and local government organizations, including the
National Conference of State Legislatures (NCSL), the Federation of Tax Administrators (FTA),
and the Multistate Tax Commission (MTC).

10 National Governor’s Association, Policy Position EDC-10: Streamlining State Sales Tax Systems, February 28, 2011,
effective through Winter Meetings 2013, available at http://www.nga.org/portal/site/nga/
menuitem.b14a675ba7f89cf9e8ebb856a11010a0.
Congressional Research Service
11

---

.
State Taxation of Internet Transactions

Support also comes from large retailers who must collect sales taxes and believe the current
system provides an unfair advantage to Internet retailers who do not collect such taxes. Many
large brick-and-mortar companies with a strong Internet presence generally comply with
guidelines like those under SSUTA and generally collect taxes on remote sales. Several retailers,
however, are taking the middle ground in this debate. They understand the states’ desire to more
efficiently collect sales tax revenue in a fair manner, but they ask for greater simplification and
increased vendor compensation from the states for collecting state sales taxes.
Opponents of SSUTA legislation include state and local governments who feel the administrative
obstacles to streamlined sales taxes are too costly to overcome and may actually exceed the
potential revenue gain. These governments suggest that increased compliance with use tax laws
may better be achieved through elevated consumer awareness and more enforcement activities. In
addition, some business groups maintain that the collection requirement, even with streamlining,
would still be too burdensome.
Also opposing SSUTA legislation are several anti-tax groups who see the SSUTA as a new tax
burden rather than a simplification of the current tax system. Anti-tax groups also argue that states
compete to attract businesses and customers through lower tax rates and that this competition is
good for consumers.
Congressional and State Legislative Activity
Remote seller collection legislation at the federal level includes bills requiring SSUTA adoption
and bills that are not conditioned on SSUTA approval. State efforts have taken two tracks:
adopting SSUTA type legislation and/or implementing so-called Amazon laws. Following is a
brief discussion of this activity.
SSUTA Legislation
In the 112th Congress, S. 1452 (and H.R. 2701) would grant SSUTA member states the authority
to compel out-of-state vendors in member states to collect sales and use taxes. The legislation
would have responded to the Supreme Court’s recommendation in Quill Corporation v. North
Dakota that Congress act, under the Commerce Clause, to clarify state sales tax collection rules.
More specifically, the legislation would have allowed states that have fully adopted the SSUTA to
collect sales taxes from sufficiently large businesses, even if those businesses do not have a nexus
in the state. A “sufficiently large business” is left to the governing board of the SSUTA to define.
Under S. 1452, Congress would grant authority to states to compel out-of-state vendors to collect
sales taxes, on the condition that 10 states comprising at least 20% of the total population of all
states imposing a sales tax have implemented the SSUTA. The legislation also includes additional
requirements for administering the new sales tax system after the SSUTA adoption threshold has
been achieved. These requirements included, but were not limited to,
• a centralized, one-stop multi-state registration system;
• uniform definitions of products and product-based exemptions;
• single tax rate per taxing jurisdiction with a single additional rate for food and
drugs;
Congressional Research Service
12

---

.
State Taxation of Internet Transactions

• single, state-level administration of sales and use taxes;
• uniform rules for sourcing (i.e., the tax rate imposed is based on the origin or
destination of the product);
• uniform procedures for certification of tax information service providers;
• uniform rules for filing returns and performing audits; and
• reasonable compensation for sellers collecting and remitting taxes.
The SSUTA generally includes these provisions, though some modifications to the SSUTA or the
legislation may be necessary for enactment.
Under the SSUTA, member states request that remote sellers voluntarily collect sales taxes on
items purchased by customers outside their home state. Vendors in participating states who
voluntarily collect the sales tax would be offered amnesty for previously uncollected taxes.
Participating states have agreed to share the administrative burden of collecting taxes to ease tax
collection for sellers. The states’ obligations under the SSUTA include the following
requirements.
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. The tax treatment of business purchases is not uniform across
states. According to some estimates, approximately 18% of business purchases are taxable
depending on the state.
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 promoting public health, often hold
sales tax-exempt status.
The SSUTA would establish a system in which states would use common definitions for goods
and services. Once a uniform definition is established, states would then indicate whether the
good or service is taxable. In addition, states would identify which entities would be exempt from
paying sales taxes (e.g., non-profit or religious organizations).
Other Remote Seller Sales Tax Collection Legislation
In the 112th Congress, H.R. 3179, the Market Place Equity Act of 2011, introduced by
Representative Womack, would attempt to achieve the same policy objective without a formal
multistate compact like SSUTA. Instead, H.R. 3179 would authorize states to compel out-of-state
vendors to collect sales and use taxes if the following requirements were satisfied:
Congressional Research Service
13

---

.
State Taxation of Internet Transactions

• the state creates a remote seller sales and use tax return and requires filing no
more frequently than in-state vendors;
• the state maintains a uniform tax base across the state;
• the state uses one of three structures for remote sales tax collection: (1) a single
state and local “blended” rate, (2) a single maximum state rate exclusive of any
additional local rates, or (3) the destination rate which would be the actual rate of
the customer’s jurisdiction.
In addition, a final condition requires that the rates determined in (1) and (2) above cannot exceed
the average rate applicable to in-state vendors. For purposes of (3), the state must provide vendors
access to a tax rate database for all jurisdictions. Remote vendors with total United States remote
sales under $1 million or remote vendors with less than $100,000 in a given state, are exempt
from collection responsibility.
Amazon Laws
Some states have begun to enact what are called “Amazon Laws.” The “Amazon” modifier refers
to the large Internet retailer that is located in Washington State. Amazon collects sales taxes only
in the states where they claim their presence legally requires collection. In addition to Washington
State, Amazon reportedly collects sales taxes in these additional states: Kansas, Kentucky, New
York, and North Dakota.11 At issue are affiliate agreements between Amazon and retailers that
provide an Internet portal to Amazon. Typically, the affiliates are compensated for transactions
that result from the so-called “click through” to Amazon.
New York State, the first to enact a so-called Amazon Law in 2008, claimed that the affiliate
relationship constituted physical presence for Amazon.12 Along with the physical presence
established by the affiliate relationship came responsibility for collecting sales taxes on products
sold to New York residents by Amazon. Several legal challenges to these so-called Amazon laws
have been presented; a thorough legal analysis of these challenges extends beyond the scope of
this report. Some proponents of the SSUTA see the growth of Amazon Laws as possibly
complicating simplification efforts.
Economic Issues
During the debate about so-called “streamlining” legislation, there are several economic issues
Congress may consider: (1) How will the SSUTA influence the economic efficiency and equity of
state tax systems? (2) What will be the impact of changes in the treatment of Internet transactions
on states that are more reliant on the sales tax? (3) What will the potential revenue loss be, absent
changes in the treatment of Internet transactions? A summary of these issues follows.

11 The American Independent Business Alliance, an advocacy group supporting the collection of sales taxes on
Amazon sales, identified these states. The information is available at http://www.amiba.net/resources/news-archive/
amazon-nexus-subsidiaries.
12 Other states with an “Amazon Law” include Illinois, Rhode Island, and North Carolina. For more see Steele, Thomas
H., Andres Vallejo, and Kirsten Wolff, “No Solicitations: The ‘Amazon’ Laws And the Perils of Affiliate Advertising,”
State Tax Notes, March 28, 2011, pp. 939- 944.
Congressional Research Service
14

---

.
State Taxation of Internet Transactions

Efficiency
A commonly held view among economists is that a “good” tax (or more precisely, an efficient
tax) minimizes distortions in consumer behavior. Broadly speaking, economists maintain that
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. As noted earlier,
however, under the current state sales tax system, all consumption expenditures are not treated
equally. The growth of tax-free Internet transactions, both business-to-business and business-to-
consumer, will likely amplify the efficiency losses from altered consumer behavior.
An alternative theory concerning economic efficiency in sales taxation is referred to as “optimal
commodity taxation.” Under an optimal commodity tax, the tax rate is based on (or determined
by) what is termed the price elasticity of demand for the product (sometimes called the “Ramsey
Rule”). Products that are price inelastic, meaning quantity demanded is unresponsive to changes
in price, should be levied a higher rate of tax. In contrast, 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 as behavioral changes are reduced. However, the price elasticity of products available
over the Internet is difficult to measure and the efficiency gain, if any, is suspected to be small.
An additional economic inefficiency arises if vendors change location to avoid collecting sales
taxes. The location change would likely result in higher transportation costs. 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 Virginia consumer who wants to buy a set of woodworking chisels. 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 (even though the Internet is
more expensive, it is more convenient), is therefore just as likely to buy from the Internet retailer
as from the local retailer.
Virginia imposes a state and local sales tax of 5.0%, thus yielding a final sales price to the
consumer of $52.50. 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 Georgia-based
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 ($52 less $50) represents the efficiency loss to society from evading the use tax.
Note that in the absence of sales and use taxes, the Internet vendor in the above example may
yield to market forces and close up shop. However, if the Internet vendor continues to operate
even without the tax advantage, it could be the case that consumers are willing to pay higher
prices for the convenience of Internet shopping. If this were true, then the higher “production
costs” for Internet vendors would not necessarily result in an efficiency loss.
Congressional Research Service
15

---

.
State Taxation of Internet Transactions

Equity
The sales tax is often criticized as a regressive tax—a tax that disproportionately burdens the
poor. 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. Consumers without ready Internet access are not
afforded the same opportunity to “evade” the sales and use tax. In this way, electronic commerce
may arguably 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.
Equity issues also arise with respect to businesses. Currently, local retailers are required to collect
sales taxes for the state at the point of sale. Internet retailers, in contrast, are not faced with that
administrative burden. Thus, two otherwise equal retailers face different state and local tax
burdens. In relatively high tax rate states, this disparity may be significant. As noted earlier,
consumers in these high tax rate states have a greater incentive to purchase from out-of-state
vendors, exacerbating the tax burden differential.
Differential Effect Among States
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 state tax rates. As noted above, 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 less reliance)
would tend to have a smaller wedge between the two modes of transaction. States with both a
high rate and high reliance would tend to recognize the greatest revenue loss from a ban on the
taxation of Internet transactions.
Revenue Loss Estimates
Researchers estimated in April 2009 that total state and local revenue loss from “new e-
commerce” in 2011 will be approximately $10.1 billion.13 “New e-commerce” 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.
California is projected to lose $1.7 billion; Texas, $774 million; and New York, $770 million.


13 Bruce, Donald, William F. Fox, and LeAnn Luna, “State and Local Government Sales Tax Revenue Losses from
Electronic Commerce,” State Tax Notes, 52(7):537-558, May 18, 2009. Version available at University of Tennessee
Center for Business and Economic Research, http://cber.bus.utk.edu/ecomm.htm.
Congressional Research Service
16

---

.
State Taxation of Internet Transactions

Author Contact Information

Steven Maguire

Specialist in Public Finance
smaguire@crs.loc.gov, 7-7841


Congressional Research Service
17

---