E N Q U I R E R B U S I N E S S C O V E R A G E

Thursday, December 30, 1999

Ky. fears Net will hurt tax revenues


The Associated Press
FRANKFORT — The growing popularity of online shopping may lead to a decline in Kentucky's sales tax revenues, a report concludes.

A survey of online buyers indicated many were unlikely to remit the tax voluntarily. Perhaps more significantly, one in three had never heard of the sales and use tax they were expected to pay for mail-order and online purchases.

The findings are in a report, “Collecting Taxes in the Cyberage: How Online Purchases Could Affect Revenue Collections.”

The report was being released today by the Kentucky Long-Term Policy Research Center.

Loss potential unclear

“Consumers are obligated to pay sales or use tax on the products and services they purchase over the Internet, but it is widely believed that few do,” the report said.

“Consequently, the growth of electronic commerce has fostered a series of tax and revenue policy concerns for state governments. Many governors, legislators and fiscal policy analysts consider issues surrounding the taxation of electronic commerce to be the major state tax policy concern of the next decade,” the report said.

Kentucky state government derives about 35 percent of its revenues from sales and use taxes.

The potential loss was unclear.

The report cited 14 separate studies of consumer online shopping in the United States in 1999. Estimates of spending were as little as $3.9 billion and as high as $36 billion.

A tiny fraction pays

Kentucky's sales tax rate on retail goods is 6 percent. If items are ordered by catalog, telephone or Internet from an out-of-state vendor, the charge is a “use” tax.

Taxpayers are supposed to report what they owe in use taxes when filing individual income tax returns.

The tax form directs them to total their purchases, using credit card bills and other records, and to add 6 percent of the total to their tax liability.

In reality, only a fraction of taxpayers comply, the report said. The state collected $712,000 in use taxes in 1997; it probably was owed $72 million, the report said.

“The law is virtually unenforceable, in Kentucky and everywhere else, effectively making the Internet a massive, borderless, tax-free zone,” the report said.