Study: State hit hard by Internet tax losses (AP) � South Dakota stands to lose a greater share of its sales-tax money to Internet transactions than do most other states, according to a study published by The University of South Dakota.
Partly because South Dakota lacks a personal income tax, the state relies on the "sales tax workhorse" to provide a steady stream of money for state and local governments, the authors of the study said.
The study indicates that in South Dakota, about 36 percent of all state and local tax money comes from general sales taxes. The average for the nation is 25 percent.
That heavy reliance on the sales tax puts South Dakota in a precarious position as more and more companies and consumers conduct their business on the World Wide Web.
Currently, if consumers or businesses buy products on the Web from an out-of-state seller, the seller cannot be forced to collect taxes unless the seller has a physical presence in the state where the purchase was made.
Researchers who were cited in the USD study said South Dakota lost nearly $40 million to Internet purchases in 2001. By 2011, the researchers estimate the total could grow to $161 million.
"? The sales tax workhorse is indeed suffering a substantial handicap � proportionately more in South Dakota than in most other states," said the authors of the study.
Researchers project that by 2011, South Dakota could lose 8.56 percent of its total tax revenue to Internet sales. Projections for the rest of the nation average 5.39 percent.
The USD report also said the state's rural nature may increase the cases of Internet purchases of items that cannot be obtained locally.
South Dakota and 19 other states have passed legislation that makes it easier for companies to comply with sales tax laws. The states still lack the power to enforce those laws on out-of-state sellers, because Congress presently has the sole right to regulate commerce among the states.
As it becomes easier for remote sellers to comply with the sales-tax laws of all the states, Congress might be encouraged to act and require those sellers to comply.
Such a move, according to the authors of the USD study, "would not only restore the sales tax workhorse's power, but could make it stronger than ever."