Skip to main content

KNOXVILLE — Tennessee is among the states hit hardest by tax revenue loss from Internet sales, a new University of Tennessee study shows.

Drs. Bill Fox and Donald Bruce of UT’s Center for Business and Economic Research project Tennessee to lose $362 million from untaxed e-commerce in 2001, with loss estimates climbing to $1.5 billion in 2011.

These estimates include e-commerce transactions that would not have been taxed even if conducted conventionally, such as tax-exempt purchases, person-to-person sales, or on-line mail order.

Loss estimates only for e-commerce that would have been taxed if conducted otherwise — identified in the study as “new” e-commerce losses — are $191 million in 2001 rising to $808 million in 2011.

When tax losses from mail-order purchases, cross-state shopping, legislative exemptions and other factors are included, the state’s total estimated tax revenue loss is $450.7 million for 2001 and $1.9 billion for 2011.

“When other factors causing sales-tax revenue to shrink are added in, the projected tax increases are even higher,” Fox said.

The study says Tennessee would have to raise its sales tax rate 1.6 percent by 2006 to offset e-commerce losses. That is the biggest tax increase required of any state to make up for lost revenues.

The study also estimates Tennessee’s 2001 loss from e-commerce are 4.8 percent of total state taxes, the fourth highest percentage among states.

“If you look at the percentage loss, you see that Tennessee is one of the most heavily impacted states,” Fox said in an interview. “This is a very big issue for us.

“Clearly, if there is no tax on commerce on the Internet, Tennessee would be severely hampered. A sales tax cannot be an effective revenue instrument if I go to a store and must pay tax on an item, and not pay tax if I order the same item via Internet.”

Fox said losses of that magnitude would cripple state and local governmental services such as schools, law enforcement and fire protection and lead to higher taxes.

The Institute for State Studies, a Salt Lake City-based nonprofit organization that examines public policy related to technology, commissioned the UT study. Results were released Tuesday at the National Press Club in Washington, D.C.

The study updates previous estimates by Fox and Bruce, raising the estimate for total U.S. e-commerce losses 41 percent to $13.3 billion in 2001.

Based on data from Forrester Research Inc., a leading e-commerce firm, the UT study projects revenue losses in 2001 from a low of $21 million in Vermont to a high of $1.75 billion in California, with total U.S. e-commerce losses of $54.8 billion in 2011.

A complete copy of the study is available at: Center for Business and Research, University of Tennessee: