December 6, 2007

Farr: Sales Tax Revenue Lost to Online Sales A Lot Lower Than Forecast

Tennessee Department of Revenue commissioner Reagan Farr admitted Wednesday that the state isn't losing nearly as much in sales tax revenue from online sales than previously forecast by University of Tennessee economist Bill Fox.

Online merchants that have no physical presence in a state are not required to collect that state's sales tax from customers from within that state, and some brick-and-mortar merchants had set up their online stores as legally separate entities.

In 2004, Fox forecast the state would lose $600 million to $900 million annually in sales tax revenue as more people shopped online. Here's what Farr had to say yesterday:

"I would say fairly confidently that that number is less today," Farr said while testifying before a Joint Committee on Business Taxes hearing Wednesday morning in Nashville.

"A lot of retailers have decided for business reasons that having an online store that is completely and legally segregated from its brick and mortar store is not the best way to do business. People like to be able to order something over the internet and if it doesn't fit or if they don't like the color they like to be able to take it back to the store in their home community and not have to ship it back.

"So because of that customer-driven - a lot of the major online presences that have brick-and-mortar equivalents here in the state have started collecting Tennessee sales tax from their website store. That's a positive and we're very happy about that.

"I still think we do lose a significant amount of revenue from remote sales but I would say it is significant less than the $600-$900 million estimate given in 2004."

"I would say it's very comfortable to say its $200 to $300 million."

Update: I went digging into my archives to find the specifics of that 2004 forecast, and found something else, too: Even that forecast, now known to be way high, was itself a climb-down from earlier even-more-dire predictions by Dr. William Fox and the economists at the University of Tennessee whose work is one of the foundations of state budget and tax policy year to year.

In a report released in mid-July 2004, Dr. Fox, director for the UT Center for Business and Economic Research, and research assistant professor Dr. Donald Bruce estimated that by 2008 Tennessee would lose between $612.5 million and $957.9 million in state and local revenue from e-commerce.

But three years before that, in 2001, Fox and Bruce were painting an even more dire picture. In this report, released in September 2001, they estimated Tennessee lost up to $450.7 million in uncollected sales tax revenue due to online purchasing in 2001, and would lose $1.242 billion annually by 2006.

Now we know the forecasts were way high, and the actual revenue "loss" due to online shopping is less than a quarter of what Dr. William "Chicken Little" Fox predicted.

(Special thanks to Ben Cunningham for pulling the vide clip out of the hour-plus video. I need to invest in some WM Recorder software...)