November 11, 2002

A Legion of Errors

There are numerous errors of fact and apparent omissions of proper questioning in this story in today's Nashville City Paper regarding Internet sales and the state sales tax.

Below, the story, with comments of correction added in italics.

Bredesen looks for fixes to Internet, parks woes
By Skip Cauthorn

Governor-elect Phil Bredesen said recently that he’s concerned about the state’s dependence on the sales tax — 9.75 percent on the dollar in some areas — in light of dollars leaking out of the state from Internet sales. Those sales aren’t taxed if items are purchased from out-of-state locations.

“There is an Internet and mail order problem,” said Bredesen. “It’s been growing.”

Many say Tennessee’s reliance on the sales tax as its primary revenue source makes the growth in Internet sales problematic. Economists told the General Assembly last session that the state is losing roughly $300 million per year in sales taxes, and that this number is growing.

The data is based on faulty academics and pro-income tax spin - and the $300 million figure is ludicrous. The state sales tax rate at the time that figure was announced was 6 cents per dollar of spending. For the state to lose $300 million because of online sales, the people of Tennessee would have to be spending $5 billion a year online. Tennessee has approximately 5.6 million people, so that's $892 per person, or almost $4,000 per family of four.

If Tennesseans were shopping online at that rate, and if Tennesseans were shopping online at the national average, then U.S. consumers would be spending $240.8 billion a year online. Consider that the fourth quarter of the year is typically the best quarter for online shopping. Forrester Research predicts that this year U.S. consumers will spend about $20 billion online during the fourth quarter, a record. Fact is, U.S. consumers aren't spending anywhere near $240.8 billion online. "Total e-commerce sales last year were estimated at $32.6 billion, an increase of 19.3 percent from 2000," reports the Silicon Valley/San Jose Business Journal, citing U.S. Census data. There are 270 million people in the United States, give or take a few million undocumented illegals the INS hasn't bothered to track down and kick out yet. Let's do a little math. $32,600,000,000 divided by 270,000,000 people works out to $120 spent online per person in all of the year 2001. Not anywhere close to the $892-per-Tennessean figure that Gov.-elect Bredesen - he of supposedly superior intellect and business acumen - has swallowed like a 2-year-old accepting the existence of the Easter Bunny.

Chances are, Tennesseans aren't shopping online at a rate equal to or above the national average. According to the Progressive Policy Institute, a moderate Democrat think tank in Washington DC, only about 60% of U.S. households are wired.

The most wired city in Tennessee is Nashville, according to Nielsen//NetRatings, as reported in mid-2001. Only 53.2 percent of the homes had Internet access - slightly more than half. Tennessee as a whole is less wired. A report from the Tennessee Regulatory Authority in June 2000 said this:

Overall, the TRA’s analysis found that Tennessee’s digital divide is even more widespread than the national divide - with only 37.5 percent of Tennesseans owning personal computers, as compared to 42.1 percent nationally. The report further shows that even fewer Tennesseans are connected to the Internet, despite the fact that computer ownership statewide has doubled since 1994.

It also said this: Tennesseans are less likely to own computers and to be connected to the Internet than the national average.

And this: Computer penetration in Tennessee’s urban areas exceeds rural areas in every income category, and only one-third of the state’s rural residents own computers.

The TRA also said 37 percent of Tennesseans own or have access to a computer, compared to 48 percent nationally. Data from the National Telecommunications and Information Administration backs up the general picture of Tennessee's population being less "on-line" that the national average.

But per capita income in Tennessee $26,988) is well below the national average ($30,472) - ranking 34th among the states in 2001 - making it highly unlikely Tennesseans spend online at the same rate as consumers do nationally.

So, being generous, let's imagine that half of all Tennesseans are now shopping online. That means they have to be spending, on average, approximately $1,800 per person (or $7,200 per family of four) per year over the Internet, an absurdly high number. On the other hand, if the Census data is correct, and the average American resident spent $120 online in 2001, and we extrapolate that number to Tennessee, then the state lost just $40.3 million in sales taxes due to online shopping in 2001 - nowhere near the $300 million-plus scare tactic that is being tossed around. And that's only if you accept the notion that all of those sales would have been taxable if they took place in Tennessee, which is dubious at best.

At this point in reporting the story, I'd have asked Bredesen if he was aware of a study showing that Internet sales are having a negligible impact on state sales tax collections - specifically, this one from 1998, just four years ago (and in the middle of the ecommerce boom), which pointed out the following:

"An estimate of the sales and use tax not collected in 1998 from the increase in remote sales due to the Internet is less than $170 million, or only one-tenth of one percent of total state and local government sales and use tax collections. An estimated 80 percent of current ecommerce is business-to-business sales that are either not subject to sales and use taxes or are effectively subject to use tax payments by in-state business purchasers. An estimated 63 percent of current ecommerce business-to-consumer sales are intangible services, such as travel and financial services, or exempt products, such as groceries and prescription drugs, which generally are not subject to state and local sales and use taxes." - from a report by Robert J. Cline and Thomas S. Neubig, Ernst & Young Economics Consulting and Quantitative Analysis.

Incidentally, the report that purports to show Tennessee is losing more than $300 million in sales taxes due to e-commerce was commissioned by the Salt Lake City-based Institute for State Studies, a public policy group connected with the National Governors' Association, both of which have endorsed taxing online sales. And do you know who wrote the report? University of Tennessee economist Dr. Bill Fox, a longtime cheerleader for higher taxes in general and a state income tax for Tennessee in particular.

The City Paper continues:

However, states are basically waiting on action by Congress, which currently has a ban on taxing the Internet across state lines.

Not true. Congress did not ban Internet sales taxes. The Commerce Clause of the United States Constitution bans them, a position upheld by the U.S. Supreme Court in the 1992 Quill decision. Basically, the court said that states can not levy their sales taxes on merchants in other states that don't have a physical presence in the state that wants to levy the tax.

Many opponents of such a tax say the Internet’s burgeoning growth must be allowed to mature and that taxation could possibly harm the relatively new market.

I'd agree with that.

“[Congress] is going to have to deal with this,” said Bredesen. “For every car bought in state there are 50 computers bought from out of state.”

I'd have asked the governor-elect his source for that stat. If he couldn't provide one, I'd have excluded the claim from my story -r quoted it and then reported that Bredesen couldn't say where the data came from. My guess is, the claim is just as dubious as the "more than $300 million a year in lost revenue" malarkey.

Sadly, the City Paper is falling well short of its goal of providing a well-written and balanced alternative to the liberal Tennessean.