KNOXVILLE, Tenn.– When Tennessee’s sales tax was first established, its creators had no concept of the World Wide Web.
But as state government’s primary revenue producer turns 50 this week, on-line commerce looms as its biggest problem, Dr. Matthew Murray of the University of Tennessee’s Center for Business and Economic Research said.
“The toughest challenge facing Tennessee’s sales tax for the next several years is electronic commerce,” Murray said. “Entertainment products such as music, software and games are delivered directly through the Internet.
“Even goods that can’t be delivered through the phone lines, such as appliances and furniture, have the potential to be tax-exempt if they are purchased through on-line transactions.”
Murray, who also heads UT-Knoxville’s economics department, said there is strong political opposition against taxing on-line purchases. They also are difficult to track and define under state law, he said.
As more businesses go on-line and consumers shop on the Internet, tax revenues will shrink, he said.
“We must respond to changes in the economic landscape,” Murray said. “The share of spending on tangible goods — our traditional tax base — is falling.
“Spending on services is rising, but it is not being taxed. In a state like Tennessee, that makes it difficult to raise money to fund state programs.”
While no one knows the amount drained from state coffers through electronic commerce, Murray said it could surpass the $100 million in tax revenues Tennessee loses yearly on mail-order purchases. These also are difficult to tax, he said.
Murray said other untaxed services in Tennessee include those provided by beauticians, lawyers, accountants and surveyors.
Tennessee established a two percent sales tax under former Gov. Jim McCord in 1947. The original levy exempted most consumer services and relied heavily on taxes on businesses.
That concept has change very little in 50 years and it is hurting the state’s economy, Murray said.
“Fifty years ago, services were a small share of individual household consumption. The tax focused on goods purchased by business,” Murray said.
“Today, we still are grappling with those two legacies. The tax did not and does not embrace the full array of consumer services. It still falls heavily on the business community.
“Ironically, as the state sales tax mechanism reaches the half-century mark, its chief historical legacies –failure to tax consumer services and taxation of business inputs — also represent its greatest challenges.”
Contact: Dr. Matt Murray (423-974-5441)