SALES TAXES

States Could Gain 

Revenue from 

Expanded Authority, 

but Businesses Are 

Likely to Experience 

Compliance Costs

Report to Congressional Requesters

November 2017

GAO-18-114

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-18-114, a report to 

congressional requesters

November 2017

SALES TAXES

States Could Gain Revenue from Expanded Authority, 

but Businesses Are Likely to Experience Compliance 

Costs

What GAO Found

Forty-five states and the District of Columbia levy taxes on the sale of goods and 

certain services, including those sold remotely, such as over the Internet. In 

1992, the Supreme Court ruled in Quill v. North Dakota that a state can only 

require a business to collect and remit sales tax if the business has substantial

presence, referred to as nexus, in that state. However, the decision stated that 

Congress could pass legislation to overrule this limitation. In general, under 

present law, if a seller does not have nexus in a state, and therefore does not 

collect tax, then a purchaser is required to pay a use tax in the same amount to 

his or her state government. 

GAO estimated that state and local governments can, under current law, require 

remote sellers to collect about 75 to 80 percent of the taxes that would be owed 

if all sellers were required to collect tax on all remote sales at current rates. GAO

found that the extent to which state and local governments can require 

businesses to collect taxes varies with the type of remote seller and by state.

GAO Low and High Scenario Estimates of State and Local Government 2017 Potential 

Revenue Gains from Expanded Tax Collection Authority on Remote Sales

Dollars in billions Low scenario estimate High scenario estimate

Business-to-consumer (B2C)

Internet retailers 3.2 4.8

E-marketplace sellers 3.9 6.2

Other remote retailersa 1.5 1.8

(less consumer use tax compliance) (0.2) (0.2)

B2C total 8.4 12.5

Business-to-business (B2B)

Merchant wholesale e-commerceb 1.0 2.9

(less business use tax compliance) (0.9) (2.0)

B2B total 0.1 0.9

Grand total (B2B + B2C) 8.5 13.4

Source: GAO analysis of Forrester Research, Internet Retailer, U.S. Census Bureau, and company financial data. | GAO-18-114

Note: Totals may not sum due to rounding. These estimates are the potential revenue state and local 

governments could gain in calendar year 2017 if granted the legal authority to require all remote 

sellers to collect taxes on all remote sales.

a

Includes catalog, mail-order, call center, and television shopping channel retail companies.

b

Merchant wholesale e-commerce sales includes manufacturers’ sales branches and offices, but 

excludes agents and brokers, and excludes sales made via electronic data interchange networks.

GAO estimated that state and local governments could gain from about $8 billion 

to about $13 billion in 2017 if states were given authority to require sales tax 

collection from all remote sellers. This is about 2 to 4 percent of total 2016 state 

and local government general sales and gross receipts tax revenues.

Some businesses would likely see increases in several types of costs if required 

to collect taxes on all remote sales. These costs would be higher for businesses 

not currently experienced in multistate tax collection. Officials from state revenue 

departments told us that they generally do not anticipate major administrative 

costs or challenges if given the authority to require businesses to collect tax on 

all remote sales.

View GAO-18-114. For more information, 

contact James R. McTigue, Jr. at 

(202) 512-9110 or McTigueJ@gao.gov.

Why GAO Did This Study

Over the past two decades, 

e-commerce sales have grown rapidly,

greatly expanding a category of sales 

known as remote sales. Under current 

law, states cannot require all 

businesses to collect taxes on remote 

sales. Congress has been considering 

proposals to change this. Little current, 

nationwide information exists to inform 

the debate.

In this report, GAO (1) estimated

revenue states and localities could 

gain by being able to require 

businesses to collect taxes on all 

remote sales, and (2) described what 

is known about the related compliance 

costs and challenges to businesses, 

and administrative costs and 

challenges to states.

GAO estimated 2017 revenue gains to 

state and local governments based on 

actual and estimated sales data for 

remote sellers, excluding certain sales

that were exempt from taxation or

already collected by remote sellers 

with a substantial presence in a state. 

Ranges for GAO’s estimates were 

based on a number of key 

assumptions that were varied based on 

available data. To describe related 

costs and challenges to businesses 

and states, GAO interviewed officials 

from state revenue agencies, subject 

matter specialists, and a wide variety 

of retailers with remote sales and the 

organizations that represent them.

GAO provided a draft of this report to 

subject matter specialists who agreed

with the general approach that GAO

followed in making its estimates.

What GAO Recommends

GAO is not making recommendations 

in this report. 
Page i GAO-18-114 Sales Taxes

Letter 1

Background 3

Taxes are Collected on Most Remote Sales, but States Could 

Gain Additional Revenue with the Authority to Require All 

Businesses to Collect Taxes 8

Some Businesses Would Likely Incur Several Types of Costs If 

Required to Collect Taxes on All Remote Sales 15

States Generally Do Not Anticipate Major Administrative Costs or 

Challenges If Given the Authority to Require Businesses to 

Collect Tax on All Remote Sales 27

Appendix I: Methodology for Revenue Gain Estimates 34

Appendix II: State and Local Government Potential Revenue Gains 48

Appendix III: GAO Contact and Staff Acknowledgments 50

Tables

Table 1: Low and High Scenario Estimates of 2017 E-commerce 

and Other Remote Sales, and Percent of Taxes State and 

Local Governments Can Collect from Remote Sellers 9

Table 2: GAO Low and High Scenario Estimates of State and 

Local Government 2017 Potential Revenue Gains from 

Expanded Tax Collection Authority on Remote Sales 12

Table 3: GAO Low and High Scenario Estimates of 2017 Ecommerce and Other Remote Sales 35

Table 4: GAO Low and High Estimates of Percent of Taxes State 

and Local Governments Can Collect from Remote Sellers 40

Table 5: GAO Low and High Scenario Estimates of State and 

Local Government 2017 Potential Revenue Gains from 

Expanded Tax Collection Authority on Remote Sales 45

Table 6: Estimates of State and Local Government 2017 Potential 

Revenue Gains from Expanded Tax Collection Authority 

on Remote Sales 48

Contents
Page ii GAO-18-114 Sales Taxes

Figure

Figure 1: Start-up, Collection, Remittance, and Response 

Activities for Software Assisted Multistate Tax Collection 16

Abbreviations

B2B business-to-business

B2C business-to-consumer

CPA Certified Public Accountant

NAICS North American Industry Classification System

This is a work of the U.S. government and is not subject to copyright protection in the 

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Page 1 GAO-18-114 Sales Taxes

441 G St. N.W.

Washington, DC 20548

November 16, 2017

The Honorable Ron Wyden

Ranking Member, Committee on Finance

United States Senate

The Honorable Jeanne Shaheen

Ranking Member, Committee on Small Business and Entrepreneurship

United States Senate

Over the past two decades, electronic commerce (e-commerce) sales 

have grown rapidly, but, under current law, states cannot require all 

e-commerce businesses to collect taxes on sales to residents of their 

states.1 Congress has been considering proposals that would allow this. 

In 2000, when we last looked at remote sales, we found that the data 

available at the time were not well suited to track rapidly evolving Internet 

activity.2

Today, even with better information on the potential revenue losses, 

debate still exists over both estimates of lost revenue to states and on the 

ability of all businesses—particularly small businesses and businesses in 

states that do not have sales taxes—to collect and remit taxes to 

jurisdictions across the country in a cost-effective way. There is also 

uncertainty about the costs and other challenges of expanded collection 

that could be incurred by state revenue agencies.

You asked us to review the effects on businesses and state revenue 

agencies of legislation that would grant states the authority to require 

businesses to collect and remit taxes on all remote sales. This report (1) 

estimates how much revenue state and local governments could gain by 

being able to collect taxes on sales made by all remote sellers, (2) 

describes what is known about the costs and challenges remote sellers 

experience in trying to comply with current state tax laws, and how those 

costs and challenges might change if states were given the authority to 

require businesses to collect on all remote sales, and (3) describes what 

 1

Quill v. North Dakota, 504 U.S. 298, 318 (1992).

2

GAO, Sales Taxes: Electronic Commerce Growth Presents Challenges; Revenue Losses 

are Uncertain, GAO/GGD/OCE-00-165 (Washington, D.C.: June 30, 2000).

Letter
Page 2 GAO-18-114 Sales Taxes

is known about costs and challenges states face in requiring remote 

sellers to collect taxes.

To estimate the revenue that state and local governments could gain by 

being able to collect taxes on all remote sales, we updated a model we 

originally developed in 2000 to perform similar analyses. We used data—

that we determined to be reliable—on the volume and composition of 

Internet and other remote sales, the taxability of remote sales, and the 

extent to which sellers already collect and purchasers already pay tax on 

remote sales. Detailed information about our methodology, including the 

data sources we used, is provided in appendix I. 

To identify the types of costs and challenges that businesses will likely 

face if required to collect and remit taxes on all remote sales, we 

reviewed literature, conducted market research on software used by 

businesses to facilitate tax collection, and identified knowledgeable 

parties from whom we could solicit information. We interviewed 

representatives from 12 legal, advocacy, or accounting groups and we 

solicited them for contacts in the remote sellers’ business community 

whom we could interview. We reviewed witness testimony before 

congressional committees on the subject of remote sales to understand 

the costs associated with sales and use tax collection as well as to 

identify groups and individuals to interview. We interviewed a nongeneralizable sample of more than 20 businesses or their 

representatives. This includes businesses of different sizes, from different 

industries, and included businesses with and without sales tax 

obligations. We also attended conferences of the American Bar 

Association and the American Catalog Mailers Association where the 

topic of remote sales tax collection was discussed.

To describe what is known about costs and challenges that state revenue 

agencies might face in requiring all remote sellers to collect taxes, we 

interviewed representatives from the National Conference of State 

Legislatures, the Federation of Tax Administrators, the Multistate Tax 

Commission, and the Streamlined Sales Tax Governing Board. Between 

February and October 2017, we monitored tax industry publications to 

identify state actions to increase tax collections on remote sales, like bills 

debated in state legislatures or administrative rules promulgated by state 

revenue agencies. As state legislatures debated, and in some cases, 

enacted these proposals, we reviewed revenue and cost estimates 

developed by legislative budget offices or state revenue agencies to help 

us identify the types of potential costs and challenges associated with 

these new actions. For additional data and insights, we interviewed 
Page 3 GAO-18-114 Sales Taxes

officials from five state revenue agencies including three states that had 

recent experience with changing their laws or regulations related to 

remote sales tax collection.

We subjected our work to third-party review by noted specialists in the 

field of tax policy. These experts agreed with the general approach that 

we followed in making our estimates. The experts confirmed that 

uncertainty surrounds many of these factors incorporated into the model.

We conducted this performance audit from September 2016 to November 

2017 in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives.

Forty-five states and the District of Columbia levy sales taxes on the sale 

of goods and services.3 Of these, thirty-seven states also have local sales 

taxes at the county or municipal level. Five states do not have statewide 

sales taxes: Alaska, Delaware, Montana, New Hampshire, and Oregon.4

Tax policy specialists have cited figures as high as 12,000 and as low as 

10,000 for the number of tax jurisdictions in the United States—each with 

potentially different tax rates, different rules governing tax-exempt goods 

and services, different product category definitions, and different 

standards for determining whether an out-of-state seller has a substantial 

presence (referred to as nexus) in a state.

On average, states receive about one-third of their total tax collections 

from general sales taxes. However, reliance on sales taxes varies 

considerably across states. Five states that do not have a broad-based 

individual income tax—Florida, Nevada, South Dakota, Tennessee, and 

Texas—collect more than half their tax revenue from general sales 

 3

For this report, we are referring to general taxes on the sale of goods and services.

4

Alaska and Montana do not have statewide sales taxes but do have local sales taxes.

Background
Page 4 GAO-18-114 Sales Taxes

taxes.5 As of January 1, 2017, most state sales tax rates were about 6 

percent, although analysis prepared by the Tax Foundation shows that 

five states—Alabama, Arkansas, Louisiana, Tennessee, and 

Washington—had average combined state and local tax rates close to or 

above 9 percent.6

Generally, businesses are required to collect sales taxes on goods and 

services sold to in-state consumers at the time of the purchase, and remit 

those taxes to the state, and sometimes local government, revenue 

office.7 The growth of e-commerce has greatly increased the likelihood of 

businesses selling to out-of-state customers. In 1992, the U.S. Supreme 

Court ruled in Quill v. North Dakota that a state can only require a 

business to collect and remit sales tax if the business has substantial 

presence, referred to as nexus, in that state.8 However, the decision 

 5

On the basis of U.S. Census Bureau data, Washington State also collects more than half 

its tax revenue from general sales taxes. However, Census data includes gross receipts 

taxes that are closer to business taxes than to general sales taxes. There are additional 

reasons why the Census data for general sales tax revenues are not strictly comparable 

across states. See, John L. Mikesell, “Disparities in State Retail Sales Taxes in Fiscal 

2016,” State Tax Notes Magazine, July 24, 2017. 

6

The Tax Foundation publishes data on combined state and local sales tax rates by state 

using U.S. Census population data to calculate weighted average local rates. See Jared 

Walczak and Scott Drenkard, “State and Local Sales Tax Rates in 2017,” Tax Foundation 

Fiscal Fact, No. 539, January 2017.

7

Generally, states require that in-state sellers collect sales tax on goods and services at 

the point of sale. States can require that out-of-state sellers collect an equivalent “use tax” 

on the sale of goods and services if the sellers have substantial presence (nexus) in the 

state. The use tax, which complements the sales tax, is imposed on the purchaser for the 

privilege of use, ownership, or possession of tangible goods or services. For this report, 

and in keeping with common usage, we generally use the term “sales tax,” when 

technically the correct term would be “use tax,” when referring to the tax remote sellers 

could be required to collect on sales to out-of-state customers. We use the term “use tax” 

when referring to the taxes that consumers self-remit on their purchases.

8

504 U.S. 298 (1992). Out-of-state sellers generally meet nexus standards if they have an 

office or place of business, agent, or significant property in the taxing state. 
Page 5 GAO-18-114 Sales Taxes

stated that Congress could pass legislation to overrule the Quill decision.9

Legislation has been proposed to expand states’ tax collection authority 

to all remote sales, but no bill has received enough support to pass both 

the Senate and the House of Representatives.10 Some of the legislation 

has included provisions for small seller exemptions, free software, liability 

protection, and transition periods.

In general, under present law in states with sales taxes, if the seller does 

not have nexus in a state, and is therefore not required to collect tax, then 

the consumer is required to pay a use tax in the same amount. Although 

functionally similar to a sales tax, the use tax is a tax levied on the 

consumer for the privilege of use, ownership, or possession of taxable 

goods and services. However, consumer compliance rates for use tax 

remittance are estimated to be very low.11

With the growth in e-commerce, states have increased their enforcement 

activities to collect sales tax from residents who make purchases from 

out-of-state businesses. A few states have passed laws or changed

regulations that directly challenge or test the limits of the 1992 Quill v. 

North Dakota decision—most notably, Alabama, Colorado, and South 

Dakota—to increase tax collections on remote sales. In reviewing 

testimony and tax industry publications, we found that states have also 

sought additional revenue through more indirect approaches, such as 

 9

The court explained: “This aspect of our decision is made easier by the fact that the 

underlying issue is not only one that Congress may be better qualified to resolve, but also 

one that Congress has the ultimate power to resolve. No matter how we evaluate the 

burdens that use taxes impose on interstate commerce, Congress remains free to 

disagree with our conclusions.” 504 U.S. at 318. The Court also considered in Quill

whether North Dakota’s statute violated the Due Process Clause and held that Quill

purposely availed itself of the benefits of the economic market in North Dakota and those 

contacts were more than sufficient for due process purposes. While Congress could 

overturn the Commerce Clause holding in Quill, Congress cannot authorize violations of 

the Due Process Clause. 504 U.S. at 305–308.

10See Marketplace Fairness Act of 2017, S. 976, 115th Cong.; Remote Transactions Parity 

Act of 2017, H.R. 2193 115th Cong. The Senate passed a version of the Marketplace 

Fairness Act in 2013, but the House of Representative did not take action on an 

equivalent or similar bill. 

11A 2015 study prepared for the Minnesota legislature observed that in the 27 states that 

allow taxpayers to pay use taxes on their state income tax returns, only about 1 to 2 

percent of returns included use taxes. See, Minnesota House of Representatives, “Use 

Tax Collection on Income Tax Returns in Other States,” updated 2015, 

www.house.leg.state.mn.us/hrd/pubs/usetax.pdf, accessed March 20, 2017.

State Activity
Page 6 GAO-18-114 Sales Taxes

asserting jurisdiction on the basis of nexus to include “affiliate nexus” and 

“click-through nexus.”12

Colorado for instance enacted a law requiring retailers who do not collect 

taxes on sales to Colorado customers to notify those customers of their 

use tax obligations and send an annual report on customers’ purchases 

to the state revenue agency.13 The revenue agency could then use this 

information to identify which purchasers have a use tax obligation.

South Dakota took a different approach aimed at overturning the Quill

decision. In 2016, the legislature passed a law requiring out-of-state 

businesses meeting certain criteria to collect and remit sales tax on 

purchases made by South Dakota residents.14 The state supreme court 

ruled on September 13, 2017, that the law violated Quill.15 On October 2, 

2017, South Dakota filed a petition for a writ of certiorari with the U.S. 

Supreme Court.

Alabama promulgated a regulation in September 2015 requiring out-ofstate retailers who made $250,000 or more in sales to Alabama residents 

annually, or who conducted one or more statutorily defined activities, to 

 12Affiliate and click-through nexus laws apply a collection obligation to a remote business 

on the basis of affiliated third parties within a state acting to promote that business’s 

products. For example, some online retailers pay independent online affiliates (bloggers or 

small website owners) a commission for each customer who makes an online purchase 

after clicking a link on the affiliate’s webpage.

13Colo. Rev. Stat. § 39-21-112(3.5)(d). The law includes exemptions for smaller sellers 

with less than $100,000 in annual sales to Colorado residents. The Direct Marking 

Association challenged the statute on the grounds that the state law discriminated against 

out-of-state businesses because it only required them to make these notifications. The 

Tenth Circuit disagreed and ruled for the state, holding that the statute did not discriminate 

between in- and out-of-state businesses, but between businesses who collected the tax 

and those that did not. Direct Mktg. Ass’n v. Brohl, 814 F.3d 1129, 1133 (10th Cir. 2016). 

Several out-of-state businesses collected the tax and so were not subject to the 

notification requirement. Since the Colorado case was decided, Louisiana, Vermont, and 

Washington have enacted similar laws.

14S.B. 106, 2016 Legis. Assemb., 91st Sess. (S.D. 2016). The law requires out-of-state 

businesses with more than $100,000 in annual sales, or 200 or more transactions, to 

South Dakota residents to collect and remit sales taxes. The law was passed in response 

to a statement by U.S. Supreme Court Justice Anthony Kennedy expressing interest in 

overturning Quill. The state passed the law to serve as the vehicle for the U.S. Supreme 

Court to take up the case. 

15South Dakota v. Wayfair Inc., 2017 S.D. 56.
Page 7 GAO-18-114 Sales Taxes

collect and remit sales tax.16 A suit was filed with the Alabama Tax 

Tribunal, but no decision has been made.

New York took a different route passing a “click-through” nexus law in 

2008.17 Some out-of-state retailers enter into agreements with local online 

retailers to advertise the local retailer’s merchandise on the out-of-state 

retailer’s website. Because the agreement was with an in-state vendor, 

the law defined that to be a sufficient nexus to impose sales tax on the 

out-of-state-vendor. Several companies unsuccessfully challenged the 

statute.18

A few state governments have taken action to increase tax collection from 

e-marketplace sellers. As of October 2017, two states (Minnesota and 

Washington) had passed laws imposing new requirements on 

e-marketplace companies to collect sales taxes on behalf of the sellers 

using their e-marketplace platforms.19 Some states have asserted that the 

warehousing of goods and fulfillment of orders from within a state is 

enough to create nexus, and therefore a requirement to collect taxes on 

sales to customers in that state.20 To enforce compliance, we found that 

at least three state revenue agencies have been seeking sales, shipping 

or location data about goods sold through e-marketplaces.

 16Ala. Admin Code r. 810-6-2-.90.03 (2015).

17N.Y. Tax Law § 1101(b)(8)(vi).

18Overstock.com, Inc. v. New York State Dep’t of Taxation & Fin., 987 N.E.2d 621, 624 

(N.Y. 2013). The New York Court found that because the local retailer was present in the 

state, the physical presence requirement was met. A petition for writ of certiorari to the 

U.S. Supreme Court was denied.

19The Washington law is scheduled to go into effect on January 1, 2018. 2017 Wash. 

Sess. Laws 2588–2614. The Minnesota law will not go into effect until 2019, or sooner if 

the U.S. Supreme Court reverses its Quill decision. 2017 Minn. Sess. Laws ch. 1, art. 3, 

§§ 9-12, 44.

20An e-marketplace company can provide fulfillment services to its sellers whereby a 

seller’s goods can be stored in the e-marketplace company’s regional warehousing and 

sorting centers. 
Page 8 GAO-18-114 Sales Taxes

We estimate that state and local governments can, under current law,

require remote sellers to collect about 75 to 80 percent of the taxes that 

would be owed if all remote sellers were required to collect tax on all 

remote sales at current rates.21 We found that the extent to which state 

and local governments can, under current law, require businesses to 

collect taxes on remote sales varies with the type of remote seller (as 

shown in table 1). For business-to-consumer (B2C) remote sales, we 

found that the percentage of taxes already being collected by sellers 

(which we call the “seller collection rate”) was generally higher for Internet 

retailers than for other types of remote sellers like catalog retailers or 

e-marketplaces.22

 21In 1992, the U.S. Supreme Court ruled in Quill v. North Dakota that a state can only 

require a business to collect and remit sales tax if the business has substantial presence, 

referred to as nexus, in that state.

22For our revenue estimates, we defined e-marketplaces as companies that, via the 

Internet, arrange for the purchase or sale of goods owned by other individual sellers, but 

do not take title to those goods. 

Taxes are Collected 

on Most Remote 

Sales, but States 

Could Gain Additional 

Revenue with the 

Authority to Require 

All Businesses to 

Collect Taxes

State and Local 

Governments Are Able to 

Collect Taxes on More 

Than Half of Sales
Page 9 GAO-18-114 Sales Taxes

Table 1: GAO Low and High Scenario Estimates of 2017 E-commerce and Other 

Remote Sales, and Percent of Taxes State and Local Governments Can Collect from 

Remote Sellers under Current Law

2017 estimated sales 

(dollars in billions)

Percent of sales taxes 

collectible

Low 

scenario 

estimate

High

scenario 

estimate

Low 

scenario 

estimate

High

scenario 

estimate

Business-to-consumer (B2C)

Internet retailers 339 318 86% 78%

E-marketplace sellers 85 106 33% 14%

Other remote retailersa 58 61 64% 58%

Business-to-business (B2B)

Merchant wholesale e-commerceb 714 729 n/a n/a

(less exempt intermediate goods) (428) (364) n/a n/a

Adjusted B2B sales 285 364 94% 85%

Legend: 

n/a = not applicable

Source: GAO analysis of Forrester Research, Internet Retailer, U.S. Census Bureau, and company financial data. | GAO-18-114

Note: Percentage of sales taxes collectible is: (1) the estimated taxes state and local governments 

can currently collect from remote sellers due to remote sellers having a substantial presence (nexus) 

in, or collection agreements with, a state, divided by; (2) the estimated potential taxes state and local 

governments could collect from having authority to require all remote sellers to collect taxes 

regardless of nexus.

a

Includes catalog, mail-order, call center, and television shopping channel retail companies.

b

Merchant wholesale e-commerce sales includes manufacturers’ sales branches and offices, but 

excludes agents and brokers, and excludes sales made via electronic data interchange networks.

Based on our analysis of nearly 1,000 Internet retail companies, we 

estimate that about 80 percent of the potential revenue from requiring all 

Internet retailers to collect is already collectible.23 Many of the largest 

Internet sellers are established retail chains or consumer brands with a

physical presence, such as retail stores, in all, or nearly all, of the 45 

states (plus the District of Columbia) that have a statewide sales tax. As 

noted earlier, under current law, if a remote seller has a substantial 

presence (referred to as nexus) in a state, the seller is required to collect 

 23We analyzed data from Internet Retailer on the top 1,000 companies in 2017. 

Appendix I provides more information on the data sources we used and our methodology 

for estimating state and local government revenue gains. For the purpose of this report, 

collectible tax revenue is what states have the authority under current law to require 

sellers to collect. Our analysis did not examine actual seller compliance rates.
Page 10 GAO-18-114 Sales Taxes

taxes on remote sales into that state.24 In addition, even without being 

required to, some large Internet retailers have entered into agreements 

with states to collect applicable taxes on all their Internet sales,

regardless of physical presence.

The rise of e-marketplaces, such as eBay, Etsy, and Amazon 

Marketplace, has complicated nexus determinations. At these 

marketplaces, sellers can access large customer bases and utilize the 

marketing and distribution services of the marketplace platform, often for 

a fee. Certain states can rely on inventory stored within their borders as 

sufficient nexus to impose taxes. This has included sellers using a large 

marketplace’s fulfillment services. As a result, to properly collect and 

remit taxes, sellers using marketplace fulfillment services need 

information on where their inventory is stored.

While we estimated the seller collection rate to be relatively high for the 

category of Internet retailers (about 80 percent), we found it to be lower 

for other types of B2C remote sellers. For example, we estimate that 

e-marketplace sellers are currently collecting 14 percent of the taxes on 

their sales, in our highest potential revenue gain estimate, to up to 33 

percent, in our lowest potential revenue gain estimate. For other types of 

remote retailers, such as mail-order companies, we estimate that they are 

currently collecting tax on 58 percent of their sales in our highest potential 

revenue gain estimate and up to 64 percent of their sales in our lowest 

potential revenue gain estimate (as shown in table 1).

Although business-to-business (B2B) sales account for a larger share of 

total e-commerce than B2C sales, potential state and local government 

revenue gains from taxing all of these sales is less because fewer B2B 

sales are taxable, and seller collection rates are higher (as shown in table 

1). We estimate that about half of all wholesale e-commerce purchases 

involve businesses purchasing raw materials or other intermediate goods 

that are then manufactured or incorporated into a final product. These 

purchases of intermediate goods are generally exempt from state and 

local government taxes because only the final sale to the end consumer 

 24Some states in recent years have asserted that affiliated businesses of out-of-state 

sellers, and marketing relationships between out-of-state sellers and in-state websites or 

blogs, create nexus sufficient to impose sales tax collection requirements.
Page 11 GAO-18-114 Sales Taxes

would be taxable.25 For the remaining taxable B2B purchases, we 

estimate that the seller collection rates are between 85 percent for those 

sales in our highest potential revenue gain estimate and 94 percent in our 

lowest potential revenue gain estimate.

Based on the seller collection rates we estimated using high and low 

scenarios to illustrate the effect of underlying uncertainties, we 

determined that state and local governments could potentially gain about 

$8 billion based on our low scenario to about $13 billion, based on our 

high scenario, in 2017 if they were given expanded authority to require 

sales tax collection from all remote sellers. Table 2 presents our range of 

estimates. Appendix II presents our range of estimates for each of the 45 

states plus the District of Columbia that have a statewide sales tax. Our 

estimates range from more than $1 billion for more populated states like 

California and Texas to about $20 million for less populated states like 

Vermont and Wyoming. The average gain is about $200 million.

 25If a business pays sales taxes on intermediate goods and raw materials, then the tax 

becomes part of the price of that business’s final goods. Taxing both the sale of 

intermediate goods and final products results in what economists call tax pyramiding. 

Some states like Hawaii, New Mexico and South Dakota tax the sale of many business-tobusiness intermediate goods and services.

Potential Revenue Gain 

across All States for 2017 

is about $8 billion to $13 

billion Based on our Low 

and High Scenario 

Estimates
Page 12 GAO-18-114 Sales Taxes

Table 2: GAO Low and High Scenario Estimates of State and Local Government 

2017 Potential Revenue Gains from Expanded Tax Collection Authority on Remote 

Sales

Dollars in billions

Low scenario 

estimate

High scenario 

estimate

Business-to-consumer (B2C)

Internet retailers 3.2 4.8

E-marketplace sellers 3.9 6.2

Other remote retailersa 1.5 1.8

(less consumer use tax compliance) (0.2) (0.2)

B2C total 8.4 12.5

Business-to-business (B2B)

Merchant wholesale e-commerceb 1.0 2.9

(less business use tax compliance) (0.9) (2.0)

B2B total 0.1 0.9

Grand total (B2B + B2C) 8.5 13.4

Source: GAO analysis of Forrester Research, Internet Retailer, U.S. Census Bureau, and company financial data. | GAO-18-114

Note: Totals may not sum due to rounding. These estimates are the potential revenue state and local 

governments could gain in calendar year 2017 if granted the legal authority to require all remote 

sellers to collect taxes on all remote sales.

a

Includes catalog, mail-order, call center, and television shopping channel retail companies.

b

Merchant wholesale e-commerce sales includes manufacturers’ sales branches and offices, but 

excludes agents and brokers, and excludes sales made via electronic data interchange networks.

In aggregate, our national estimate of about $8 billion (low scenario) to 

about $13 billion (high scenario) represents about 2 to 4 percent of total 

state and local government general sales tax revenues. According to data 

from the U.S. Census Bureau, state and local governments in 2016 

collected about $377 billion in general sales and gross receipts taxes.26

We found that the extent to which state and local governments can 

require remote sellers to collect taxes varies by state. Based on analyses 

of remote sellers’ nexus locations, we estimate that some of the largest 

states (in terms of population) can currently require sellers to collect 

about 80 to 90 percent of the taxes these states could collect with 

 26U.S. Census Bureau, Quarterly Summary of State and Local Government Tax Revenue 

for 2017: Q1, released June 20, 2017, available at: https://www.census.gov/programssurveys/qtax.html. Census data includes gross receipts taxes that are closer to business 

taxes than to general sales taxes. 

Larger States Collect Taxes on 

a Greater Share of Remote 

Sales than Smaller States
Page 13 GAO-18-114 Sales Taxes

expanded authority on all remote sales. In contrast, we estimate that 

some smaller states can only require sellers to collect and remit about 60 

to 70 percent of the taxes they could collect on all remote sales. The 

difference is based on the greater likelihood of Internet retailers having a 

physical presence in larger states.

We researched store locations and sales tax policies for the largest 100 

Internet retailers identified by researchers at Internet Retailer.27 We found 

that about 85 percent of these Internet retailers had store locations in, or 

stated on their websites that they were collecting sales taxes for, 

California and New York. By contrast, about 55 percent of these large 

Internet retailers had stores or were collecting in less populated states 

like North Dakota and Wyoming.

For smaller Internet retailers with only one location, we also found that a 

disproportionate share of them were located in larger states. Based on 

our analysis of more than 400 Internet retailers with only one location, we 

found that 19 percent were located in California and 12 percent in New 

York. With Internet retailers and other remote sellers less likely to have a 

physical presence in less populated states, smaller states are at a 

disadvantage compared to larger states in their ability to require remote 

sellers to collect taxes on all sales into their states.

We estimate that nearly half of potential revenue gains to state and local 

governments would result from collecting sales taxes on all e-marketplace 

sales. To date, e-marketplaces have not been obligated to collect state 

sales taxes on behalf of sellers. Instead, like with all remote sellers, 

individual sellers who have title to the goods being sold through an 

e-marketplace are required to collect tax on sales to states in which they 

have nexus. However, we identified two states that have recently taken 

action to attribute a collection obligation to the e-marketplace. 

Through our review of tax industry publications and interviews with tax 

practitioners, we learned that some individual sellers have difficulty 

 27Internet Retailer—a product of market research company Digital Commerce 360—

provides annual rankings and other statistics on e-commerce companies. We excluded 

five companies from the first 100 on Internet Retailer’s 2017 Top 1000 list: three of the 

companies were coin and bullion sellers whose sales are generally tax-exempt; one 

company had been acquired in 2015 by another retailer on the list; and one company was 

an e-marketplace whose sales we analyzed separately. Our analysis is based on 95 of the 

top 100 plus all remaining 900 companies. See appendix I for more information on our 

methodology.

About Half of Potential 

Revenue Gains Could Come 

from Tax Collections on 

E-Marketplace Sales
Page 14 GAO-18-114 Sales Taxes

obtaining information from the e-marketplace companies on where their 

goods might be stored. While the three large e-marketplaces that we 

interviewed offer their sellers additional services that help sellers 

calculate and collect sales taxes, not all sellers take advantage of this 

service. None of the e-marketplaces that we interviewed could provide us 

data on the extent to which their sellers currently collect sales tax. Given 

the lack of available data, we made a conservative estimate of potential 

revenue gains to states if given the authority to require all e-marketplace 

sellers to taxes on all their sales. If e-marketplace sellers are currently 

collecting less tax than we assume in our model, the actual potential 

revenue gain to states would be higher than the estimate we provide in 

this report.

Because state and local governments currently do not have the authority 

to require businesses to collect tax on all remote sales, states generally 

require taxpayers who were not charged a tax on their purchases from 

out-of-state vendors to pay a use tax on those purchases.28 However, 

with the exception of purchases that are required to be registered with the 

state, such as vehicles, voluntary compliance is generally thought to be 

extremely low. For those states that permit taxpayers to report use taxes 

on their income tax returns, it is estimated that only about 1 to 2 percent 

of returns include use tax payments.29 Unlike estimates for individual 

compliance with use tax, estimates for business compliance are high, 

ranging from 70 to 90 percent.30 Some tax practitioners we interviewed 

told us that businesses routinely retain records of their taxable and taxexempt purchases, including remote purchases, and are more likely to be 

compliant with any use taxes.

 28Some states with statewide income taxes permit taxpayers to pay use taxes when filing 

income tax returns, whereas other states require taxpayers to file a separate use tax form. 

A few states also have de minimis exemptions for low dollar amount out-of-state 

purchases, and some states allow taxpayers who have not kept complete records of outof-state purchases to estimate the use tax owed.

29Minnesota House of Representatives, “Use Tax Collection on Income Tax Returns in 

Other States,” updated 2015, www.house.leg.state.mn.us/hrd/pubs/usetax.pdf, accessed 

March 20, 2017.

30Washington State Department of Revenue, “2016 Compliance Study,” June 1, 2016. 

California Board of Equalization, “Electronic Commerce and Mail Order Sales,” April 4, 

2017. Mississippi Public Universities Research Center, “Projections of Mississippi Use Tax 

Revenue Lost from Remote Sales,” January 2017. Vermont Legislative Joint Fiscal Office, 

“Remote Sales Tax Presentation” before the House of Representatives Committee on 

Ways and Means, January 12, 2017.

Compliance with Use Tax on 

Most Remote Purchases is 

Low for Individual Taxpayers, 

but High for Businesses
Page 15 GAO-18-114 Sales Taxes

We identified at least four states that have begun implementing new laws 

intended to increase consumer use tax compliance. Under these “notice 

and reporting” laws, remote sellers not collecting taxes on out-of-state 

sales are required to notify customers that they may be liable for use 

taxes to their home state. The states are also requiring remote sellers to 

send their out-of-state customers an annual summary of all purchases for 

which sales tax was not collected. Data from these annual summaries are 

shared with state revenue agencies that can use this information for 

enforcement purposes. Data were not yet available to estimate the 

revenue effects of these new programs. As we have previously reported, 

tax compliance is generally much higher when there is third-party 

reporting of information to the revenue agency.

31 We expect that state 

collection of third-party information will achieve similar results.

We identified various costs associated with typical steps involved in 

multistate sales tax collection. We group these costs into three broad 

categories: software related costs, audit and assessment compliance 

costs, and costs associated with research and liability. We found that 

businesses with limited experience in multistate tax collection and those 

that lack software systems designed to facilitate multistate tax collection 

would incur the highest costs under such a scenario. 

Representatives from a large national chain and a trade group 

representing retailers told us that, generally speaking, larger retailers and 

those that primarily engage in brick-and-mortar retailing believe that 

expanded state authority would end the unfair advantage that remote 

retailers gain by not collecting sales tax on their out-of-state sales. Those 

familiar with multistate collection explained that because the software 

used for multistate collection is easily scaled up, retailers already using 

such systems, would incur few challenges to adapt to this expanded 

authority. Further, larger retailers that already collect in many states 

would already have the systems in place for collection under expanded 

authority. We also identified state and national efforts for simplifying tax 

collection for businesses. These efforts show potential for mitigating the 

expected costs, but much depends on the specifics of any legal changes.

 31GAO, Tax Gap: Sources of Noncompliance and Strategies to Reduce It, GAO-12-651T

(Washington, D.C.: Apr. 19, 2012).

Some Businesses 

Would Likely Incur 

Several Types of 

Costs If Required to 

Collect Taxes on All 

Remote Sales
Page 16 GAO-18-114 Sales Taxes

Our research found that a number of commercial software offerings are 

available to assist businesses with collecting sales taxes in multiple 

states. Two people familiar with the use of tax software told us that 

although many standard business software products generally include 

some sales tax functionality, these systems do not always fully support 

businesses selling in multiple tax jurisdictions. As a result, sellers with 

more widespread collection obligations typically use specialized multistate 

sales tax software. A representative from a Certified Public Accounting 

(CPA) firm explained that costs are incurred both when businesses collect 

sales tax from customers, and when they remit the tax to the appropriate 

state revenue department. In some instances, there are also start-up 

costs that businesses incur prior to tax collection, as well as audit or 

assessment costs that occur after tax collection. Figure 1 summarizes 

these steps and can help inform the discussion of the specific costs.

Figure 1: Start-up, Collection, Remittance, and Response Activities for Software 

Assisted Multistate Tax Collection

The cost of both collecting and remitting sales tax rises with increased 

exposure to tax jurisdictions. As the number of jurisdictions for which a 

business collects taxes increases, the amount of administrative work also 

increases. Businesses will have to prepare and file a greater number of 

returns, license more functionality from the collection software they use, 

and collect tax on a greater number of sales. All of these actions add 

additional costs to a business’s operations.

Businesses Selling 

Remotely May Incur High 

Upfront Costs to Establish 

Software for Multistate Tax 

Collection
Page 17 GAO-18-114 Sales Taxes

While all sellers would incur these additional costs, costs will be highest 

for those that do not already use software for multistate tax collection. 

This is especially true for those selling goods treated differently by 

different states and those that do not use easily-integrated software. 

Costs for collection software include, start-up costs, licensing fees, 

administrative costs, and options for premium services, such as preparing 

or automatically filing sales tax returns. Start-up costs are the costs 

associated with setting up the software for first use.

Tax practitioners told us that software is necessary for multistate 

collection because of the complexity created by unstandardized 

requirements across jurisdictions. As we note above, tax policy specialists 

have cited figures as high as 12,000 and as low as 10,000 for the number 

of tax jurisdictions in the United States. In addition to differences that exist 

among the tax codes of the 45 states and the District of Columbia with 

statewide sales taxes, many local bodies have the power to impose 

additional sales taxes on purchases within their jurisdictions.

Some tax practitioners that we interviewed said that mapping and system 

integration related to the necessary software for multistate collection are 

the most costly of the start-up activities. Mapping requires coding all of a 

business’s product offerings to the taxation categories used by the 

software. One software provider told us that generally, these software 

products do not require businesses to research the legal categorization in 

each state’s laws; however, it does require businesses to categorize 

products with sufficient precision for the software to assign its tax status 

based on state laws. For example, apparel is treated differently across 

states. Pennsylvania exempts clothing, except for formal apparel; items 

made of real, imitation, or synthetic fur; and athletic apparel. Across the 

border, New York State exempts clothing sold for less than $110; 

however, some jurisdictions do not apply these exemptions and charge a 

local sales tax on these items. 

The initial product mapping required before using multistate tax software 

can be labor intensive. As such, we expect that businesses setting up 

software for the first time, and selling goods which states treat differently 

will have more labor-intensive product-mapping work. Some software 

providers offer consulting services to assist businesses with mapping 

their offerings. Software providers, however, treat these services as a 

premium option so businesses will generally incur extra costs for using 

these services. 
Page 18 GAO-18-114 Sales Taxes

Several people familiar with the use of sales tax software said that errors 

in mapping products can expose businesses to liability in the form of 

uncollected taxes.32 Recognizing the wide variations in sales tax laws, a 

group of states launched the Streamlined Sales Tax Initiative in 1999. 

The initiative was designed to standardize these variations and provide 

software assistance to make it easier for businesses to comply with state 

and local sales and use tax laws. This initiative sought to shield 

businesses from liability by directing software providers participating in 

the effort to complete mapping for businesses and assume liability for 

errors. However, more recent changes allow software providers to 

negotiate these issues directly with their business clients. According to a 

representative of the Streamlined Sales Tax Governing Board, 24 states 

have passed legislation to conform to the Streamlined Sales and Use Tax 

Agreement.33 These states account for a third of the United States 

population, but many of the largest states (in terms of population) are not 

fully participating. 

Software integration, or establishing a connection between existing 

business software and the new multistate tax software, will be required for 

businesses that begin to use multistate tax software. Two software 

providers we spoke with said that they have already created integration 

modules for the most common business software packages in use today. 

One explained that integration with these common business systems is 

generally the least expensive and may come at no cost to the business. 

However, businesses using customized software or software that is not in 

common use may see higher costs to integrate these systems. Some 

businesses may need to integrate several systems with the collection 

software. This integration may be required for transactions such as 

processing sales through different retail channels or ensuring that 

merchandise returns are removed from existing collections. 

Businesses will also face additional costs to license the necessary 

software functionality from the provider. A public accounting firm told us 

that these on-going licensing fees are generally lower in the first year, 

 32A trade group representative also told us that in some states, over-collection of taxes 

may expose businesses to liability from class-action lawsuits brought by over-charged 

customers.

33Arkansas, Georgia, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, 

Nevada, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, Rhode Island, 

South Dakota, Tennessee, Utah, Vermont, Washington, West Virginia, Wisconsin, and 

Wyoming. 
Page 19 GAO-18-114 Sales Taxes

than the one-time costs associated with mapping and integration.34

Licensing costs generally are a function of the volume of information 

requests sent to the tax database maintained by the software provider. 

In estimating costs to license multistate collection software, online 

businesses must consider both the number of completed transactions 

they anticipate as well as the browsing behavior of those using their 

websites. A CPA firm we interviewed explained how these software 

packages work. Whenever a business website calculates a sales tax 

amount, it does so by sending an information request to a rate and 

address database maintained by the software provider. Importantly, this 

process is often an automated function of the “shopping cart” system, 

which may calculate a sales tax amount whenever a customer changes 

the goods in the shopping cart, even in the absence of a completed sale. 

As such, businesses must account for both completed transactions as 

well as how often customers change the bundle of goods in the online 

shopping cart. For example, customers may use shopping carts while 

comparison shopping on different websites. Our market research found 

licensing costs as low as $12 per month for up to 30 information requests 

each month, and as high as $200,000 per year for unlimited information 

requests. 

Businesses and others familiar with sales tax software told us that 

licensing fees are only one of multiple costs required to collect sales 

taxes in multiple states. As such, simplification proposals that include 

provisions for states to pay these licensing fees may not mitigate 

significant costs to businesses transitioning to software assisted 

multistate collection. Businesses will still incur start-up costs and 

additional administrative costs, even when states pay the licensing fees 

on the use of the software. Even under such proposals when software 

comes with no licensing fees, mapping can be labor intensive for 

businesses selling products that state tax laws treat differently, and 

integration can create costs for businesses using custom software or 

software that is not widely used. Further, for software to reduce 

administrative costs, it must be integrated with more than just a 

business’s shopping cart system. However, simplification proposals that 

only cover software licensing costs and integration with the shopping cart 

system may leave businesses with the costs of a more extensive 

integration. Businesses would either have to incur additional costs to 

 34Businesses may experience additional mapping and integration costs after start-up if 

they expand their product line or make changes to their software, among other reasons. 
Page 20 GAO-18-114 Sales Taxes

better integrate sales tax software with existing business information 

systems (such as a general ledger accounting system), or regularly 

reconcile receipts and records manually to prepare sales tax returns for 

all states where it makes sales.35

Additional costs for software include administrative costs associated with 

use of the software. These costs are incurred because even automated 

software requires some administrative work by staff. The use of optional 

premium services offered by software providers may further reduce these 

administrative costs, but increase software costs in the process. 

Administrative costs tend to be highest, as a proportion of taxes collected, 

for the smallest sellers. Some businesses told us that collecting sales tax 

in all jurisdictions where they have customers would increase staffing 

costs, even when collection is facilitated by software. Premium services 

commonly offered by software providers assist businesses with preparing 

and filing tax returns. While electing to use these services may save 

businesses labor costs, they incur additional fees to use these premium 

services. 

We interviewed several businesses based in states that do not collect a 

sales tax. They told us that they are already researching software options 

should the need to collect sales tax on all remote sales arise. These 

businesses told us that they have little experience with collecting sales 

tax. As reported above, in the first year, start-up costs for the software are 

much higher than the on-going licensing fees. Businesses that do not 

need to collect sales tax in their own state may be less likely to already 

have multistate tax collection software or in-house expertise. 

If states are allowed to require businesses to collect tax on all remote 

sales, businesses we spoke with expect audit and assessment related 

costs to rise because of increased exposure to more tax jurisdictions. 

Attorneys told us that state revenue departments also employ other lowcost enforcement tools that create compliance costs. Officials from three 

state revenue departments that we spoke with said that they primarily 

focus their audits on large businesses because audits are resource 

 35States require businesses to file sales tax returns regularly. Monthly or quarterly filings 

are common. For instance, North Carolina allows businesses with consistent tax liabilities 

of less than $100 per month to file quarterly, with the approval of the Secretary of 

Revenue.

Businesses May Incur 

Increased Audit and 

Assessment Costs as 

Exposure to Collecting 

Jurisdictions Grows
Page 21 GAO-18-114 Sales Taxes

intensive. Officials from one agency acknowledged that other 

enforcement tools, such as a letter audit, require fewer resources to use.

Some businesses told us that they already expend significant resources 

responding to audits on sales tax collection and remittance. These costs 

include making staff available, developing justification for tax claims, and 

complying with document or information requests. A representative from 

the tax department of one company with nexus in most states said that 

auditors return every few years to audit the company and that they are 

currently contending with 8 to 10 audits from different tax authorities. 

They expect audit related costs to grow with exposure to more 

jurisdictions and that will require hiring additional staff. Another business 

we spoke with said they had just dealt with an expensive audit that lasted 

3 years. They reported that they do not have the resources to comply with 

similar audits from other jurisdictions. 

We interviewed 11 businesses, attorneys, or representatives from the 

business community who said that fear of increased audits, should states 

gain expanded authority to tax remote sales, is a legitimate concern for 

businesses. Attorneys we spoke with offered several reasons that smalland medium-sized businesses will be audited should states gain the 

authority to tax remote sales. One explained that sales tax audits of small 

businesses often identify non-compliance and produce revenue. Another 

said that assessments prepared by revenue offices generally carry a 

presumption of accuracy. In practice, this places the burden of proof on 

the retailer to rebut claims made by revenue offices. However, some state 

revenue departments we spoke with said that they do not expect their 

audit resources to increase and therefore would be spread more thinly if 

states are allowed to require businesses to collect tax on remote sales. 

Two state revenue offices explained that this change would mean they 

have a much larger universe of businesses from which to select. As such, 

it is unknown how frequently businesses might have to contend with 

concurrent audits in different states. 

Travel to, and securing counsel in, remote jurisdictions would create 

additional costs for audited businesses that would not occur in the current 

environment. A business representative explained that the CPAs and 

attorneys they employ, or have on retainer, may not be able to represent 

the business in an out-of-state venue. As such, businesses would need to 

retain counsel qualified to practice in the assessing jurisdiction. 

Two business representatives also told us that businesses may be less 

successful at challenging tax assessments in out-of-state courts. This 
Page 22 GAO-18-114 Sales Taxes

may prompt them to settle claims in an out-of-state court that they might 

litigate in their home state. Further, the federal Tax Injunction Act restricts 

businesses’ ability to seek relief in federal court for matters related to 

state taxes.36

In addition to audits, state revenue departments have many low-cost 

enforcement tools at their disposal. One example is the letter audit. An 

attorney we spoke with explained that in this process, a revenue office 

sends a letter to a business stating that the office suspects they owe 

sales taxes. The business incurs costs to prove the state wrong to avoid 

the assessment. In some cases, states bypass the assessment process 

and sue the business—arguing that the business has nexus in the state 

and owes tax. In conducting interviews, we found that states also send 

information requests and questionnaires to businesses designed to 

uncover whether they have nexus obligations. One representative from a 

trade group we spoke with said that a business will normally be 

responsive in order to remain in compliance with the law, despite potential

uncertainty about the state’s authority to collect.

Businesses we spoke with in states that do not collect a sales tax 

generally were not collecting sales taxes for other states, so they had little 

experience with a sales tax audit. Further, some businesses in these 

states were not tracking the legal requirements on businesses imposed 

by out-of-state jurisdictions. Businesses located in states without a sales 

tax also may incur costs to alter business practices after initial exposure 

to sales tax audits. This might happen because the procedures they 

currently use may not withstand the taxing states’ scrutiny. 

If states gain the authority to require businesses to collect tax on remote 

sales, businesses will have to incur costs to understand their new 

compliance obligations, which can differ by state or tax jurisdiction. The 

related liability cost increases along with an increase in exposure to more 

tax jurisdictions. These costs will likely increase the most for businesses 

that do not have established legal teams, software systems, or outside 

counsel to assist with compliance related questions. We identified three 

areas, based on interviews with businesses, where these costs are most 

likely to occur. First, businesses expressed concern that changes in legal 

precedent could expose businesses to liability for past sales. Second, 

 3628 U.S.C. § 1341.

Businesses Incur Costs to 

Stay Current with Legal 

Requirements in Multiple 

Jurisdictions, but are Still 

Exposed to Risk
Page 23 GAO-18-114 Sales Taxes

some businesses reported paying assessments based on contestable 

laws. Third, some businesses reported instances where businesses’ 

actions created nexus that led to an unforeseen liability. 

The U.S. Supreme Court’s 1992 decision in Quill Corp. v. North Dakota

constrained states’ ability to tax sales originating from outside the state. 

We identified four states that recently changed their laws in an attempt to 

re-litigate this decision. A representative from the business community 

told us that the effect of the U.S. Supreme Court potentially overturning 

the Quill decision may allow laws that are on the books in many states to 

be enforced. For example, Alabama’s Department of Revenue told us that 

they have asserted jurisdiction over remote sellers under a previously 

unenforced law to further litigation challenging the Quill decision. They 

acknowledged that this action has the potential to allow retroactive 

enforcement, should the challenge succeed. However, they said the state 

was most interested in prospective compliance. Some businesses worry 

that, if legal arguments like these prevail, states will not confine 

themselves to prospective enforcement efforts. They fear that states 

could decide that businesses owe taxes from years when enforcement of 

the law did not impose collection obligations on out-of-state businesses. 

State revenue departments mail assessments, questionnaires, and other 

correspondence to out-of-state businesses. These may direct businesses 

to provide information, pay taxes, or register to collect sales taxes. In 

some cases, the Quill decision protects businesses from obligations to 

comply with these directives. Nevertheless, some businesses have 

complied. One representative from a trade organization representing 

remote businesses said that the natural tendency for a business is toward 

compliance. This may lead them to pay or comply without thoroughly 

examining the strength of their legal position. He cited a state that mailed 

around two hundred demand notices to out-of-state businesses for 

unremitted sales tax. Even though he said that these businesses did not 

have nexus in the state, more than half of businesses remitted payment. 

Another business told us that they registered to collect in a state that was 

attempting to challenge the Quill decision because they judged that the 

cost of challenging the state’s new law was likely to exceed any increased 

compliance costs. This business said that collecting the tax, but waiting to 

remit it pending the results of a legal challenge, would expose the 

business to penalties and interest.

Because state tax laws are complex and subject to change, businesses 

may not always be aware of their obligations under state law. Our 

research revealed cases where businesses incurred collection obligations 

Retroactive Enforcement

Risk of Overpayment Due to 

Compliance Culture

Risk of Unknown Nexus 

Obligations
Page 24 GAO-18-114 Sales Taxes

unknowingly. One lawyer, whose practice represents several businesses 

in sales tax related issues, described a business that was contacted by a 

nearby state’s revenue office and asked to provide information on its use 

of fulfillment services from a popular marketplace provider. The business 

downloaded a report from the marketplace provider and sent it to the 

revenue office. The business said that the marketplace provider had 

formatted the information in a way that made it uninterpretable without 

knowledge of the location codes it contained. The state revenue office 

was able to use the report to show that the marketplace’s fulfillment 

services stored the business’s property in the state. Stored property 

suffices to create a nexus obligation and the business received an 

assessment for back taxes, interest, and penalties dating back to when 

the property was first stored in the state. The lawyer we spoke with has 

seen six similar cases since that one and said that the addition of interest 

and penalties often doubles the amount of taxes owed.

Active monitoring of sales tax laws across the country can help 

businesses ensure they are compliant with all of their legal obligations. 

Businesses we spoke with differed in the way they conducted this 

research. Some undertook the research in-house. Others used software 

that provides updates when laws change. Some said that they require 

outside legal counsel to resolve difficult questions. In all cases, this 

research imposed additional costs on businesses.

Four businesses in states without sales taxes told us that they have 

incomplete research or a lack of familiarity with recent changes to state 

laws that impose obligations on out-of-state businesses. Businesses like 

these may encounter additional costs in the form of unforeseen liabilities 

or costs to conduct research.

In the course of our research, we identified strategies with the potential to 

mitigate the concerns laid out above. However, much would depend on 

the specifics of any legal changes. These strategies include: simplification 

rules for collection and remittance in multiple states, small business 

exemptions for businesses under a certain size, transition periods for 

businesses to come into compliance, and limitations on lookback periods.

Simplification Rules May Help Businesses Understand Collection 

Obligations

Simplification rules for remote sellers could provide businesses with a 

single compliance requirement instead of varied requirements from the 

jurisdictions with the authority to assess sales tax. These rules could 

Strategies Show Some 

Potential for Containing Risks
Page 25 GAO-18-114 Sales Taxes

lower research and compliance costs, and leave businesses less 

exposed to hidden liabilities. One multistate effort has created a set of 

simplified rules for collection and remittance. However, one attorney we 

spoke with said that the rationale for including and excluding certain items 

in the classification is unclear, and this leaves room for states to interpret 

the taxability in different ways. Further, some of the simplifications 

proposals we analyzed do not apply to state definitions of nexus. As such, 

it is possible that businesses might be aware of and compliant with the 

simplification rules, but unclear on how to structure their operations to 

avoid the less simple rules that come from acquiring nexus. These cases 

might require additional research costs and legal services to resolve and 

may expose a business to unforeseen liability.

Small Business Exemptions May Help Small Businesses Avoid 

Additional Costs

Small business exemptions would ensure that businesses with sales 

below a specified threshold would not be liable for taxes to remote 

jurisdictions. This could reduce research and liability costs for small 

businesses because these businesses would only have to verify that their 

sales were below the threshold that requires collection. However, some 

business representatives we spoke with said that the thresholds 

contained in many proposals were too low.

The Small Business Administration defines a small business as one with 

$32.5 million in annual sales for electronic shopping retailers, and $38.5 

million for mail-order houses.37 Federal legislation allowing states to tax 

remote sales have included a variety of small business exemptions. For 

example, one proposal would initially exempt small business with annual 

sales below $10 million, but that exemption would decline and eventually 

expire after 3 years. Another proposal would set a permanent exemption 

of $1 million in annual sales.38 New state laws and administrative 

regulations require out-of-state sellers to collect taxes. We identified small 

seller exemptions in some of these laws and regulations as low as 

 37The North American Industry Classification System (NAICS) codes for these two classes 

of retailers are 454111 and 454113. See U.S. Small Business Administration, Table of 

Small Business Size Standards Matched to North American Industry Classification System 

Codes, effective February 26, 2016, available at 

https://www.sba.gov/sites/default/files/files/Size_Standards_Table.pdf.

38See, Remote Transactions Parity Act of 2017, H.R. 2193 115th Cong.; and Marketplace 

Fairness Act of 2017, S. 976, 115th Cong. 
Page 26 GAO-18-114 Sales Taxes

$10,000 and as high as $500,000 in annual sales into the state.39

However, one business owner said that $25 million in annual sales is still 

a small business. The owner explained that such businesses can quickly 

go bankrupt and have little capital to survive downturns in the business 

cycle. Business representatives said that business models which 

emphasize low margins and high sales volume are common in remote 

sales. These businesses may have limited resources for additional 

compliance obligations. 

Transition Periods Can Help Businesses Prepare for Collection 

Obligations

Transition periods may give businesses time to examine their legal 

obligations and secure tools, such as software or legal counsel, to 

facilitate compliance but can prompt increased demand for assistance 

and services. Our work has shown that sometimes tax system transition 

deadlines are likely to prompt a large volume of requests from taxpayers 

for compliance assistance from taxing authorities.40 Because businesses 

reported that additional software or legal services would be required to 

transition to new collection obligations, we expect demand for such 

services to increase before transition deadlines.

Limits to Lookback Periods May Protect Newly Registered 

Businesses

Limited lookback periods restrict how far back a state revenue agency 

can examine a business’s records after that business registers to collect 

taxes. Attorneys that we interviewed said that registering to collect with a 

state can trigger an examination of that business’s records with an eye to 

discovering if the business owes taxes for sales prior to the registration. 

They explained that if businesses are not protected by limitations to 

lookback periods upon registration, this may inhibit registering to collect in 

 39Based on each state’s relative share of national gross domestic product or disposable

personal income, the $10,000 state exemption equates to a national exemption of about 

$400,000, and the $500,000 state exemption equates to a national exemption of about 

$18 million. In other words, a business would need to have total nationwide sales of those 

amounts before likely exceeding those states’ exemptions. At the time of our report, new 

state laws and administrative rules like these were the subject of legal action in state and 

federal courts. 

40GAO, Value-Added Taxes: Lessons Learned from Other Countries on Compliance 

Risks, Administrative Costs, Compliance Burden, and Transition, GAO-08-566

(Washington, D.C.: April 4, 2008). 
Page 27 GAO-18-114 Sales Taxes

new states. One business owner told us that the risks of additional 

scrutiny and unforeseen liability have prevented him from registering to 

collect in a nearby state where he would like to do more business. 

Limitations to lookback periods would give businesses more confidence in 

registering to collect because they would be less likely to incur additional 

scrutiny or an unforeseen liability as a result of the registration. 

Actions by state and local governments to increase tax collections on 

remote sales could require additional government resources to administer 

sales taxes. State revenue agency officials, as well as representatives 

from the Federation of Tax Administrators and other state government 

organizations we interviewed, did not identify any major increases in 

administrative costs or significant administrative challenges if states were 

given the authority to require businesses to collect taxes on all remote 

sales.

In the absence of congressional action to grant states expanded tax 

collection authority on all remote sales, state legislatures have recently 

considered, and in some cases enacted, new laws designed to increase 

tax collections on remote sales. As these proposals were being 

considered, we identified five revenue agencies or legislative budget 

offices that had estimated the costs to implement and administer these 

new programs. 41 For example, one state’s analysis concluded that 

current state revenue agency resources were sufficient to implement and 

administer the new program, and another state’s analysis determined that 

the program would have only a moderate effect on the state revenue 

agency.

Other state analyses that estimated additional annual costs varied widely, 

from a few hundred dollars to up to $4 million. While these estimates 

varied widely, we found that this information helped to illustrate potential 

challenges and costs state and local governments could face in trying to 

collect taxes from all remote sellers. Interviews with three state revenue 

agency officials who had already implemented, or were beginning to 

implement, new programs also provided us further information on 

potential administrative costs and challenges.

 41Fiscal analyses of proposed or enacted state legislation that we reviewed sometimes 

included estimates of additional revenues but did not include estimates of additional costs. 

It was unclear whether the legislative fiscal office or state revenue agency had estimated 

zero additional costs or omitted costs entirely from their analyses.

States Generally Do 

Not Anticipate Major 

Administrative Costs 

or Challenges If 

Given the Authority to 

Require Businesses 

to Collect Tax on All 

Remote Sales
Page 28 GAO-18-114 Sales Taxes

We previously reported that the following state functions are typically 

associated with administering sales taxes: identifying and registering

vendors; returns processing; enforcement; collections; and taxpayer 

services (see sidebar titled “Sales Tax Administration Activities”).42

If remote sellers were required to collect state taxes regardless of nexus, 

states may need to process an influx of new registration forms from outof-state vendors. State revenue agency officials as well as 

representatives from the Federation of Tax Administrators told us, 

however, that they did not anticipate that registering new out-of-state 

vendors and processing additional returns would pose major challenges 

to state agencies. They explained that state revenue agencies already 

process a large volume of registration changes annually as new 

businesses are created or existing businesses fail. As a result, they 

expected that new registrations from out-of-state sellers would not 

represent a significant strain on current resources.

Potential increases in new out-of-state vendor registrations could be 

lessened by states’ small seller exemptions. Some state proposals for 

increasing tax collections on remote sales have exempted smaller out-ofstate sellers with annual sales less than a certain dollar amount, or 

annual transactions less than a certain number, into a state. Recent small 

seller exemptions have set annual sales exemption thresholds ranging 

from $10,000 in Washington State to $500,000 in Massachusetts.43 One 

revenue agency official from Alabama, which began enforcing a new 

remote-seller regulation in 2016 that has a $250,000 small seller 

exemption, told us that the approximately 100 newly registered out-ofstate sellers is an extremely small share of the state’s total 40,000 

registered sellers.44

 42GAO, Tax Administration: Potential Impact of Alternative Taxes on Taxpayers and 

Administrators, GAO/GGD-98-37 (Washington, D.C.: Jan. 14, 1998). 

43Some federal legislative proposals to grant the states expanded tax collection authority 

on all remote sales also have included generally larger nationwide small seller 

exemptions.

44Alabama’s new administrative rule promulgated by the state revenue agency applies to 

out-of-state vendors with sales greater than $250,000 annually to Alabama customers. 

Given Alabama’s relative share of U.S. disposable personal income (1.2 percent) or gross 

domestic product (1.1 percent), a remote seller would need to have about $20 million in 

nationwide annual sales before likely exceeding Alabama’s small seller exemption. The 

estimated effect is to limit application of Alabama’s new rule to about the top 650 

companies on Internet Retailer’s 2017 Top 1000 list.

Sales Tax Administration Activities

Registration of vendors. States need to 

process registration forms from new vendors, 

including out-of-state vendors. States also 

need information to help identify unregistered 

vendors.

Returns processing. States require 

resources to process sales tax returns, 

including returns from out-of-state vendors. 

States typically capture data in information 

systems, and identify and process over- or 

underpayments.

Enforcement efforts. Audit resources are 

needed to verify vendors’ total taxable sales. 

When auditing out-of-state vendors, state 

revenue departments may face higher travel 

costs.

Collections. States send delinquency notices 

to vendors for late, miscalculated, or 

underpaid collections.

Taxpayer services. States provide education 

efforts and taxpayer assistance to improve 

voluntary compliance.

Source: GAO, Tax Administration: Potential Impact 

of Alternative Taxes on Taxpayers and Administrators,

GAO/GGD-98-37 (Washington, D.C.: Jan. 14, 1998). |

GAO-18-114
Page 29 GAO-18-114 Sales Taxes

States may need additional resources to process new tax returns from 

out-of-state vendors and to verify out-of-state vendors’ total taxable 

remote sales into a state. However, as tax administrators noted above 

with regard to new vendor registrations, any increase in out-of-state 

returns processing may be minimal when compared to the volume of 

routine in-state returns. When processing new out-of-state returns, states 

may need to decide whether to capture the same amount of data from 

out-of-state filers as they currently do for in-state filers in order to limit 

errors and required resources for follow-up.

Depending on whether and how some states choose to centralize 

registration and reporting for out-of-state vendors, some administrative 

costs and burdens associated with these functions might be reduced or 

mitigated. For example, a revenue agency official from Alabama told us 

that implementation of its new administrative rule (requiring out-of-state 

vendors to collect taxes on sales to Alabama customers) has been 

facilitated by having its state revenue department serve as a centralized 

collection point on behalf of local tax authorities.

Thirty-seven states, like Alabama, have local sales taxes in addition to 

statewide sales taxes. Some of these local taxes are already centrally 

collected by a state revenue agency, but in some states, local authorities 

collect them. States that are members of the Streamlined Sales and Use 

Tax Agreement have agreed to allow centralized state registration and 

reporting for out-of-state vendors.45 Louisiana, another state with many 

local sales tax jurisdictions, recently enacted a new law creating a sales 

tax board for promoting “uniformity and efficiency” of local sales and use 

tax administration.46 The law also created an independent agency within 

the state’s Department of Revenue for administering and collecting state 

and local taxes related to remote sales.

When allocating enforcement and collections resources, state 

administrators may need to weigh trade-offs between pursuing incidences 

of noncompliance (typically higher among small filers) against potential 

revenue effects (greatest among large filers). Representatives from the 

Federation of Tax Administrators did not anticipate significant increases in 

 45Some federal proposals giving states expanded tax collection authority on remote sales 

would require states to comply with the Streamlined Sales and Use Tax Agreement’s 

requirement that states centralize their registration and reporting for remote sellers. 

462017 La. Acts 274.
Page 30 GAO-18-114 Sales Taxes

enforcement costs because they said most sales tax noncompliance is 

detected not through intensive audits but through less costly automated 

matching of electronic data such as credit card sales receipts with 

business-reported sales. They also said that most noncompliance issues 

are resolved via automatically-generated correspondence with taxpayers. 

That is, most taxpayers resolve additional amounts owed or other 

noncompliance matters after receiving notification letters from state 

revenue agencies.

One state revenue agency official told us that his agency may experience 

higher travel costs associated with audits of out-of-state vendors. The

same official believed, however, that this might merely require reallocating current travel expenses from in-state audits to out-of-state 

audits rather than requiring an increase in travel budgets. The Oklahoma 

legislature recently authorized the state revenue agency to create an outof-state sales tax enforcement division. While the final bill provided the 

state agency with flexibility to staff this division using existing resources, 

the original proposal would have mandated opening a new office outside 

the state and staffing it with a minimum of five employees at an estimated 

annual cost of $450,000.

Finally, state revenue agency officials and representatives from the 

Federation of Tax Administrators told us that they anticipated some 

additional resources may be needed for taxpayer assistance such as 

providing increased telephone assistance or publishing guidance for new 

out-of-state vendors. Demand for taxpayer assistance is likely to be 

higher from smaller out-of-state vendors with less experience in collecting 

and remitting taxes to other states. The complexity of a state’s sales tax 

laws, such as rules for when to exempt a certain type of product based on 

how it is used, are also likely to affect levels of taxpayer service 

requested by new out-of-state vendors.

We identified at least four states that have enacted new “notice and 

reporting” laws in attempts to increase tax collections from remote sales. 

Under these laws, if an out-of-state seller chooses not to collect taxes on 

sales into a state, then the seller is required to notify its customers of 

state use tax obligations, send customers annual summaries of their 

purchases, and share that information with state revenue agencies. One 

state’s fiscal analysis of its new notice and reporting law estimated that 

out-of-state retailers will decide to collect the tax rather than comply with 

notice and reporting requirements. The handful of new notice and 

States Implementing 

Notice and Reporting 

Requirements May 

Experience Difficulties 

Matching Sales Data to 

Taxpayer Information
Page 31 GAO-18-114 Sales Taxes

reporting laws that we identified have only recently become effective, so it 

is unclear to what extent this has or will occur.47

We found two recent estimates of costs to implement and administer 

these new notice and reporting laws. The Louisiana Legislative Fiscal 

Office estimated that the state revenue agency would incur costs of 

$90,000 annually to administer a new notice and reporting law. By 

contrast, the Washington Department of Revenue estimated that it would 

cost about $4 million annually to administer the state’s new notice and 

reporting law. Washington revenue officials told us that most of these 

costs come from hiring new staff. They explained that increased costs are

common when they must enforce new provisions of the tax code because 

it is not easy to reassign tax staff.

State revenue agencies implementing new notice and reporting laws may 

experience difficulty matching sales information from out-of-state retailers 

with taxpayer data. Revenue officials from Colorado told us that the 

annual sales reports remote sellers are required to send to their 

customers and share with state revenue agencies, will not contain unique 

taxpayer identification data like Social Security numbers. Without these 

data, these officials explained that revenue agencies will need to use 

customers’ names and addresses to match with taxpayer returns. If 

buyers with similar names make use of the same delivery address, this 

may complicate efforts to identify a taxpayer’s use tax obligation.48

Colorado and Washington officials also told us that once their revenue 

agencies begin sending letters to taxpayers with estimated use tax 

obligations, they anticipate significant increases in phone calls and other 

requests for taxpayer assistance. In order to manage expected increases 

in call volumes and control costs, Colorado officials said they plan to be 

selective about sending notices in the first years.

 47New notice and reporting laws went into effect on July 1, 2017 in Colorado, Louisiana, 

and Vermont. A new Washington law goes into effect on January 1, 2018. The laws 

generally contain exemptions for small sellers with less than a certain dollar amount of 

annual sales into each state. The amounts range from $10,000 in Washington, to $50,000 

in Louisiana, and $100,000 in both Colorado and Vermont.

48The Louisiana Legislative Fiscal Office noted similar challenges in its estimates of state 

administrative costs and said that final costs may vary depending on how much effort is 

required to match purchasers’ names with specific taxpayers.
Page 32 GAO-18-114 Sales Taxes

Officials from Washington’s Department of Revenue told us that one part 

of their new notice and reporting law applied to e-marketplaces rather 

than sellers. Officials told us that it is easier for states to enforce 

compliance against one large entity (the e-marketplace company) instead 

of the thousands of smaller sellers that sell through the e-marketplace’s 

platform. Washington’s notice and reporting law requires e-marketplace 

companies to comply with the notice and reporting requirements if the 

e-marketplaces choose not to collect and remit taxes on behalf of their 

individual sellers.49

In August 2017, the Multistate Tax Commission began offering a general 

sales tax amnesty program for e-marketplace sellers. During the amnesty 

period, the commission would accept applications from qualifying remote 

sellers. The sellers would affirm in their applications that their only 

connection with the participating state or states is through inventory 

housed in an e-marketplace’s warehouse or fulfillment center. In 

exchange, one group of participating states would agree to waive back 

tax liabilities for sales and use taxes, as well as for income and franchise 

taxes, including penalties and interest, without regard to any lookback 

period. At the time of our report, 24 states and the District of Columbia 

were participating. The program was set to end in November 2017.

 492017 Wash. Sess. Laws 2588–2614. The Washington notice and reporting law applies 

to both out-of-state retailers and e-marketplaces with annual sales of $10,000 or more to 

Washington customers. 
Page 33 GAO-18-114 Sales Taxes

As agreed with your offices, unless you publicly announce the contents of 

this report earlier, we plan no further distribution until 30 days from the 

report date. At that time, we will send copies to the appropriate Senate 

and House committees. We will also send copies of the report to the 

Secretary of the Treasury and other interested parties. In addition, the 

report will be available at no charge on the GAO website at 

http://www.gao.gov.

If you or your staff have any questions about this report, please contact 

me at (202) 512-9110 or mctiguej@gao.gov. Contact points for our 

Offices of Congressional Relations and Public Affairs may be found on 

the last page of this report. GAO staff who made contributions to this 

report are listed in appendix III.

James R. McTigue, Jr. 

Director, Tax Issues 

Strategic Issues
Appendix I: Methodology for Revenue Gain 

Estimates

Page 34 GAO-18-114 Sales Taxes

To address our objective on estimating how much revenue state and local 

governments could gain by being able to collect taxes on sales made by 

all remote sellers, we updated a model we used to prepare similar 

estimates in 2000.1 The sidebar titled “Steps Involved in Estimating 

Potential Revenue Gains” summarizes the steps in our methodology.

Compared to when we did similar analysis in 2000, there are some areas 

where we have better data, but a single point estimate is still not possible 

because of uncertainty surrounding estimates of several key inputs to our 

model. In our 2000 report, there were few reliable data sources on which 

to base our calculations and adjustments. We noted then that projections 

of sales were particularly difficult to make given the rapidly changing 

e-commerce environment. Today, there are more data sources available 

on current and future e-commerce sales.

In addition to the past uncertainty regarding the magnitude of remote 

sales, we reported in 2000 that there was considerable uncertainty about 

the amount of tax that state and local governments were already

collecting from these remote sales. Today, data are more easily available 

on where e-commerce companies have a substantial presence (referred 

to as nexus) in states. Some research companies track this information, 

and more companies are explicitly stating on their websites in which 

states they collect sales tax. Still, we had to make several broad 

assumptions about the volume of e-marketplace sales, including the 

extent to which e-marketplace sellers were already collecting sales taxes.

As states continue to research tax losses associated with e-marketplace 

sales and pursue increased enforcement actions, we believe that more 

data could help improve the accuracy of our estimates. Additional data 

from e-marketplace companies about the extent to which their sellers are 

collecting sales taxes through the e-marketplace optional tax services 

would also help improve further analysis in this area.

To obtain sales estimates, we reviewed academic, government, and 

private-sector studies. We also contacted these authors and other 

specialists in this field to identify other potential sources of sales 

estimates. Some state revenue agencies and other researchers who have 

 1

GAO, Sales Taxes: Electronic Commerce Growth Presents Challenges; Revenue Losses 

are Uncertain GAO/GGD/OCE-00-165 (Washington, D.C.: June 30, 2000).

Appendix I: Methodology for Revenue Gain 

Estimates

Steps Involved in Estimating Potential 

Revenue Gains

Total e-commerce or other remote sales 

(from Internet retailers, e-marketplace 

sellers, other remote sellers such as 

mail-order catalogs, and merchant ecommerce wholesalers)

– Sales of exempt products

= Taxable sales (regardless of nexus)

x Tax rate

= Potential tax revenues

– Taxes paid by sellers (due to nexus)

– Taxes paid by purchasers

= Potential revenue gains

Source: GAO methodology. | GAO-18-114

The Volume and 

Composition of Internet 

and Other Remote Sales
Appendix I: Methodology for Revenue Gain 

Estimates

Page 35 GAO-18-114 Sales Taxes

estimated tax revenue losses from remote sales have used data from the 

U.S. Census Bureau to derive their base estimates of total Internet and 

other remote sales.2 While we did use some Census data in our analyses, 

we primarily relied upon data from Forrester Research (a research 

company whose data we had used in our 2000 report) to arrive at low and 

high scenario estimates for total sales volumes for different types of 

remote sales as shown in table 3. We chose not to provide a single point 

estimate, because the low and high scenarios illustrate how the numbers 

can vary—sometimes non-trivially—depending on reasonable 

assumptions about the underlying uncertainties.

Table 3: GAO Low and High Scenario Estimates of 2017 E-commerce and Other 

Remote Sales

Dollars in billions

Low scenario 

estimate

High scenario 

estimate

Business-to-consumer (B2C)

Internet retailers 339 318

E-marketplace sellers 85 106

Other remote retailersa 58 61

Business-to-business (B2B)

Merchant wholesale e-commerceb 714 729

(less exempt intermediate goods) (428) (364)

Adjusted B2B sales 285 364

Source: GAO analysis of Forrester Research, Internet Retailer, U.S. Census Bureau, and company financial data. | GAO-18-114

a

Includes catalog, mail-order, call center, and television shopping channel retail companies.

b

Merchant wholesale e-commerce sales includes manufacturers’ sales branches and offices, but 

excludes agents and brokers, and excludes sales made via electronic data interchange networks.

Forrester Research’s estimates of business-to-consumer (B2C) 

e-commerce sales for the years 2016 to 2021 presented data on 31 

different product categories to which we could then apply specific state 

sales tax rates and exemptions.3 By contrast, similar Census data were 

more limited in that: the data contained fewer categories (13 merchandise 

 2

Census issues estimates of e-commerce activity derived from four separate surveys of 

manufacturing, wholesale, service, and retail businesses. See, for example, U.S. Census 

Bureau, “E-Stats 2015: Measuring the Electronic Economy,” released May 24, 2017.

3

Forrester Research, “Online Retail Forecast, 2016 to 2021 (US), Q4 2016 Update,” 

published December 2016. 

Business-to-Consumer 

Internet Sales
Appendix I: Methodology for Revenue Gain 

Estimates

Page 36 GAO-18-114 Sales Taxes

lines plus non-merchandise receipts); the most recent data were for the 

year 2015; and the data did not include e-marketplace sales.4 Forrester 

Research’s total online retail forecast for 2016 was about $400 billion and 

nearly $450 billion for 2017. We reduced this total by about $20 billion by 

removing sales for two product categories (movie tickets and event 

tickets) that were more akin to services industry (rather than retail) 

activities.5

Unlike Census data, Forrester Research included sales from 

e-marketplaces in its e-commerce forecasts.6 Sales tax losses associated 

with e-marketplace sales have become an increasing area of focus for 

state revenue agencies, and so it was important to include in our analysis. 

To separate e-marketplace sales from the sales of other Internet retailers, 

we analyzed data from the annual reports of three leading e-marketplace 

companies and data we obtained from Internet Retailer.7 We estimated 

the value of merchandise being sold on these three leading 

e-marketplaces to be about $110 billion in 2016.8 However, some of 

these are sales by other Internet retailers using the e-marketplaces to sell 

their goods. That is, some retailers operate stores and their own websites 

but also sell their goods through “storefronts” on the e-marketplaces.9 We 

adjusted our total e-marketplace sales estimate to avoid double-counting 

retailers’ Internet sales in our analysis. In the end, we estimated that 

e-marketplace sales (excluding the sales of Internet retailers using 

 4

U.S. Census Bureau, “2015 E-commerce Multi-sector Data Tables, Table 5. U.S. 

Electronic Shopping and Mail-Order Houses (NAICS 4541) - Total and E-commerce Sales 

by Merchandise Line,” released May 24, 2017.

5

The Census classifies movie and event tickets as services. State tax rates and 

exemptions for services like movies and events vary, and even vary by locality. 

6

Census explanations of its e-commerce data state that it only includes sales from emarketplaces that take title to the goods they sell. U.S. Census Bureau, “E-Commerce 

Statistics (E-STATS): FAQs,” updated May 18, 2017.

7

Internet Retailer, “2017 U.S. Top 1000 Report,” publish date April 2017.

8

Two of the three e-marketplaces we analyzed publicly report the gross merchandise 

value of sales made via their e-marketplaces. The third, and estimated largest, emarketplace reports data on only the number of sales by third-party sellers using its emarketplace, but not the dollar value of those sales.

9

Based on a random sample of 100 companies on Internet Retailer’s 2017 Top 1000 list, 

we estimated that about 40 percent of Internet retail companies also sell their goods on 

one or both of the two largest e-marketplaces.

Business-to-Consumer 

E-Marketplace Sales
Appendix I: Methodology for Revenue Gain 

Estimates

Page 37 GAO-18-114 Sales Taxes

e-marketplaces) accounted for 20-25 percent of total 2017 online retail 

sales ($85 billion to $106 billion).

Data sources on other remote sales like mail-order catalogs or television 

shopping channels are more limited, compared to available data on 

e-commerce sales. A representative of catalog companies we interviewed 

told us that it is becoming increasingly difficult to attribute retail sales to 

particular sales channels. For example, many catalog retailers also have 

websites or sell their goods in retail stores or via e-marketplaces. We 

decided the best available estimates could be derived by separating out 

aggregate Census data on Electronic Shopping and Mail-Order Houses 

into separate e-commerce and mail-order components.10 We first 

estimated that the mail-order portion of the top-line Census category to be 

about $150 billion in 2016, but then removed about $95 billion in 

estimated mail-order prescription drug sales because nearly all states 

exempt prescription drugs from sales taxes. Using data on historical 

growth rates for the mail-order catalog industry, we then estimated the 

range of other remote sales for 2017 to be from $58 billion to $61 billion.

Forrester Research’s estimates of business-to-business (B2B) 

e-commerce wholesale trade for the years 2016 to 2021 presented data 

on 11 different product categories to which we could then apply specific 

state sales tax rates and exemptions.11 While similar Census data 

included 19 different product categories, the most recent Census data 

was only for year 2015.12 Forrester’s estimates exclude sales via

electronic data interchange networks which accounts for some of the 

difference with Census’ larger e-commerce estimate.13 Forrester 

Research’s total B2B forecast was about $825 billion for 2016 and about 

$885 billion for 2017. We removed about $125 billion in petroleum and 

petroleum products sales because these sales would generally be subject 

 10Researchers from the International Council of Shopping Centers performed analysis 

similar to ours to estimate mail-order catalog sales. See International Council of Shopping 

Centers, “Deconstructing the Census Bureau’s Retail Trade E-Commerce Figures,” Retail 

Property Insights, Vol. 23, No. 1, 2016.

11Forrester Research, “B2B Ecommerce Forecast, 2016 to 2021 (US),” published 

November 2016. 

12U.S. Census Bureau, “2015 E-commerce Multi-sector Data Tables, Table 2. U.S. 

Merchant Wholesale Trade Sales, Including Manufacturers’ Sales Branches and Offices -

Total and E-commerce Sales: 2015 and 2014,” released May 24, 2017.

13Electronic data interchange is a non-Internet based proprietary network for transferring 

electronic documents, such as purchase orders, between companies.

Business-to-Consumer 

Other Remote Sales

Business-to-Business 

Internet Sales
Appendix I: Methodology for Revenue Gain 

Estimates

Page 38 GAO-18-114 Sales Taxes

to excise (not sales) taxes and, furthermore, these sales would be taxed 

on volume (not dollar value) and we lacked volume data, such as gallons 

sold.14 We also lowered the value of the motor vehicles and parts 

category by 40 to 60 percent under the assumption that most vehicles are 

taxed when registered with state motor vehicle agencies and sales and 

use tax compliance is considered generally high.15

To estimate the amount of tax due on remote sales, we apportioned a 

share of total e-commerce and other remote sales to each state (and the 

District of Columbia) and then applied each state’s tax exemptions and 

rates to those sales. We allocated sales across states by assuming that 

each state’s share of sales to individual consumers is proportionate to the 

state’s share of U.S. disposable personal income, and that each state’s 

share of sales to businesses is proportionate to the state’s share of U.S. 

gross domestic product.16 We made this allocation for each of the B2C 

and B2B product categories. We then determined which categories of 

products and services are taxed by state and local governments and at 

what rates.

Our main sources for state and local rates and exemptions were CCH’s 

State Tax Guides and Multistate Quick Answer Charts, Federation of Tax 

Administrators’ summary tables, and the Tax Foundation’s 2017 State 

Business Tax Climate Index.17 Eight states plus the District of Columbia 

do not have additional local sales tax rates levied by cities, counties, or 

 14If we had included B2B petroleum sales in our model, it would be unlikely to significantly 

affect our revenue gain estimates because these sales are generally tax exempt. 

According to data from the Tax Foundation, only 14 states tax sales of business fuels and 

utilities. Furthermore, based on additional research, we estimated that most of these sales 

would be made by large petroleum companies with physical presence in all, or nearly all, 

states through their network of retail gas stations and distribution facilities.

15Two state revenue agencies that prepared estimates of tax losses on remote sales 

made similar adjustments to an equivalent category of motor vehicles and automotive 

equipment when using Census wholesale e-commerce data to prepare their estimates. 

16The distribution across states of disposable personal income and gross domestic 

product is so highly correlated that our aggregate results would be the same regardless of 

which of these factors we used to apportion sales.

17CCH, State Tax Guides and Multistate Quick Answer Charts. Federation of Tax 

Administrators, “State Sales Tax Rates and Food & Drug Exemptions (as of January 1, 

2017),” available at http://www.taxadmin.org/assets/docs/Research/Rates/sales.pdf , 

accessed March 24, 2017. Jared Walczak, Scott Drenkard, and Joseph Henchman, 2017 

State Business Tax Climate Index, Tax Foundation, September 28, 2016.

The Taxability of Remote 

Sales
Appendix I: Methodology for Revenue Gain 

Estimates

Page 39 GAO-18-114 Sales Taxes

other special taxing districts. For the other 37 states with both statewide 

and local tax rates, we used weighted average local rates as estimated by 

the Tax Foundation after first comparing and testing these rates with 

similar data published by the Washington State Department of 

Revenue.18

For B2B e-commerce wholesales, we made additional adjustments to 

reflect the fact that many B2B sales are exempt from tax based on the 

type of purchaser or the type of use. These purchaser and use 

exemptions are important for estimating the proportion of B2B sales that 

are exempted as raw materials or as inputs incorporated into a final 

product. Our sources of sales estimates did not disaggregate them by 

type of purchaser or types of use. In order to estimate the percentage of 

business-to-business sales that would be exempt, we used input-output 

account tables prepared by the Department of Commerce’s Bureau of 

Economic Affairs.19 These tables show the inter-industry transactions of 

the U.S. economy for 2015 and provide detailed information on the 

composition of inputs and the distribution of outputs of all major U.S. 

industries. On the basis of our analysis of the input-output data, we 

excluded a range from 50 to 60 percent of all B2B e-commerce 

wholesales from our model (see row titled “less exempt intermediate 

goods” in table 3).

20

Seller collection rates represent the share of taxes on remote sales that 

state and local governments can currently require remote sellers to collect 

due to remote sellers’ substantial presence (referred to as nexus) in a 

state. To estimate seller collection rates for selected categories of ecommerce and other remote sales, we followed an approach similar to 

that in our 2000 study. We made separate estimates for Internet retailers, 

e-marketplaces, other remote retailers, and merchant wholesale ecommerce sales because a different population of firms dominates in 

each group. Again, we chose not to use a single point estimate, because 

 18Jared Walczak and Scott Drenkard, “State and Local Sales Tax Rates in 2017,” Tax 

Foundation Fiscal Fact, No. 539, January 2017.

19U.S. Bureau of Economic Analysis, “The Use of Commodities by Industries, After 

Redefinitions (Producers’ Prices),” https://www.bea.gov/iTable/index_industry_io.cfm.

accessed July 11, 2017.

20State revenue agencies that have prepared similar analyses of revenue losses from 

remote sales exempted from 60 to 75 percent of B2B sales as intermediate goods. 

The Extent to Which 

Remote Sellers Already 

Collect Taxes
Appendix I: Methodology for Revenue Gain 

Estimates

Page 40 GAO-18-114 Sales Taxes

the low and high alternatives illustrate how assumptions made about 

collection rates can vary our model output—sometimes non-trivially. The 

ranges of our estimates are shown in table 4.

Table 4: GAO High and Low Scenario Estimates of the Percent of Taxes State and 

Local Governments Can Collect from Remote Sellers under Current Law

Percent of sales taxes collectible

Low scenario 

estimate

High scenario 

estimate

Business-to-consumer (B2C)

Internet retailers 86 78

E-marketplace sellers 33 14

Other remote retailersa 64 58

Business-to-business (B2B)

Merchant wholesale e-commerceb 94 85

Source: GAO analysis of Forrester Research, Internet Retailer, U.S. Census Bureau, and company financial data. | GAO-18-114

Note: Percentage of sales taxes collectible is: (1) the estimated taxes state and local governments 

can currently collect from remote sellers due to remote sellers having a substantial presence (nexus) 

in, or collection agreements with, a state, divided by; (2) the estimated potential taxes state and local 

governments could collect from having authority to require all remote sellers to collect taxes 

regardless of nexus.

a

Includes catalog, mail-order, call center, and television shopping channel retail companies.

b

Merchant wholesale e-commerce sales includes manufacturers’ sales branches and offices, but 

excludes agents and brokers, and excludes sales made via electronic data interchange networks.

To make our estimate for Internet retailers, we analyzed data from 

Internet Retailer’s 2017 list of the leading 1,000 U.S. companies to 

determine the states in which they collect sales taxes. We first used data 

from company financial reports to adjust Internet Retailer’s 2016 global 

sales figures for the top 100 companies to reflect only U.S. Internet 

sales.21 We also used company annual reports and a smaller list of 

leading Internet retailers from eMarketer to test the accuracy and 

 21For 98 percent of the companies in Internet Retailer’s “2017 U.S. Top 1000 Report,” the 

2016 web sales figures were identified as global sales and only 2 percent were U.S. sales. 

For the top 100 companies, we found data from 61 companies with which we could adjust 

Internet Retailer’s global sales figure to U.S.-only sales. Our average adjustment (for 

those companies we had data) was to lower the original global sales figure by 25 percent 

(meaning that on average 75 percent of the companies’ global sales were from U.S. 

customers). We also removed 5 companies from the top 100 list because: (1) all, or nearly 

all, of the company’s sales were tax-exempt (e.g., Internet retailers of coins and bullion 

like the U.S. Mint); (2) the company had been sold to another retailer; or (3) it was an emarketplace company for which we did a separate analysis. Collectively, we estimated 

that the remaining top 95 companies had about $224 billion in 2016 U.S. Internet sales.

Internet Retailers 

Collection Rates
Appendix I: Methodology for Revenue Gain 

Estimates

Page 41 GAO-18-114 Sales Taxes

reliability of Internet Retailer’s data, which we found to be sufficiently 

reliable for our purposes.

We then verified Internet Retailer’s data on the states where each of the 

top 100 companies were collecting sales taxes by comparing it to sales 

tax collection policies published on companies’ websites or lists of 

companies’ physical locations (such as retail stores, warehouses, or 

company headquarters). We performed our research on companies’

collection policies and nexus from May to June 2017. During this period 

some companies’ collection policies or nexus changed from the date 

when Internet Retailer published its Top 1000 list in April. For example, 

the largest Internet retailer completed agreements with the remaining few 

states where it was not previously collecting sales tax. As of September 

2017, the company stated on its website that it collects taxes on sales of 

all its products sold to customers in the 45 states (plus the District of 

Columbia) with statewide sales taxes. 

For 27 of the top 100 companies, Internet Retailer did not report any data 

on states where the companies were collecting sales taxes, so we used 

the results of our own nexus research. For the remaining states where we 

could do comparisons, we found Internet Retailer’s data on companies’

nexus to be sufficiently reliable for our purposes. On the basis of our 

nexus research, we found that about 40 percent of the top 100 companies 

were collecting in all 45 states (plus the District of Columbia) with 

statewide sales taxes, and three-quarters were collecting in at least half 

the states. Only 2 of the top 100 companies were only collecting in, or 

only had nexus, in one state.

To estimate the percent of sales on which Internet retailers were currently 

collecting taxes, we first allocated each company’s total sales to states 

based on each state’s share of national disposable personal income. We 

then multiplied each state’s share of sales by the combined state and 

local government weighted average tax rate to estimate the total tax 

dollars that could be collected on all sales regardless of nexus. We then 

used our nexus data for each company to estimate the tax dollars 

companies were already collecting. The ratio of these two estimates (total 

taxes collectible under current law, divided by total taxes that could be 

collected if states had expanded authority) is our estimated “seller 

collection rate.” For the top 100 companies on Internet Retailer’s list, we 

estimated this seller collection rate to be from 87 to 96 percent.

We then extended our research of companies’ nexus to the remaining 

900 companies on Internet Retailer’s top 1000 list. These remaining 900 
Appendix I: Methodology for Revenue Gain 

Estimates

Page 42 GAO-18-114 Sales Taxes

companies accounted for about 20 percent of the total dollar sales 

volume for all 1,000 companies on Internet Retailer’s list (after we had 

adjusted global sales to U.S.-only sales for the top 100). For about onethird of these 900 companies, Internet Retailer did not report any nexus 

data so we did our own research. For the other two-thirds, we relied on 

Internet Retailer’s nexus data because we found it sufficiently reliable 

based on our analysis of first 100 companies listed. Compared to the top 

100 companies, these remaining 900 companies were far less likely to 

have nexus (or said they were collecting) in all or most states. About half 

the remaining 900 companies only had nexus (or said they were 

collecting) in one state. In terms of tax dollars, we estimated that these 

900 Internet retailers were already collecting from 44 to 49 percent of the 

potential taxes that states and local governments could require to be 

collected if given expanded authority on all remote sales. For all 1000 

Internet retailers, we adjusted our estimates of dollars currently being 

collected by plus (+) and minus (-) 5 percent, which gave us a range of 

overall estimated collection rates from 78 to 86 percent for the category.

The wider range of our estimates on seller collection rates for 

e-marketplace sales is because less data were available on the extent to 

which these types of sellers already collect sales taxes. We could not find 

sufficiently reliable data on the physical locations of sellers who use 

e-marketplaces. The three major e-marketplaces (that we analyzed to 

estimate total e-marketplace sales) offer their sellers additional services 

that help sellers calculate and collect sales taxes, but not all sellers take 

advantage of this service. None of the e-marketplaces that we 

interviewed were able to provide us data on the extent to which their 

sellers currently collect sales tax. We found limited data on the extent to 

which e-marketplace sales include sales taxes. Two studies estimated 

that sales taxes were more likely to be collected by larger sellers like 

other retailers using e-marketplaces to sell some of their products. As we 

noted above when describing our methods for estimating total emarketplace sales, we estimated that about 40 percent of Internet 

retailers sell their products not only via their own stores and websites, but 

also offer their products for sale on e-marketplace sites.

In our calculations, we assumed that from 10 to 30 percent of 

e-marketplace sales were made by large sellers that collected taxes in 

most states (either due to nexus or collection agreements with states). 

After allocating those sales to states based on share of disposable 

personal income, we assumed that these large sellers collected taxes at 

the same rates we had estimated for the top 100 Internet retail 

companies. We assumed that the remaining e-marketplace sales (from 

E-Marketplace Sellers 

Collection Rates
Appendix I: Methodology for Revenue Gain 

Estimates

Page 43 GAO-18-114 Sales Taxes

70 to 90 percent) were made by smaller sellers with only one nexus, and 

that these small sellers were geographically located similar to other 

Internet retailers with only one nexus. After allocating those sales to 

states, we assumed that these small sellers collected taxes only in their 

home state. Our resulting seller collection rates for all e-marketplace 

sellers ranged from 14 to 33 percent.

Due to a lack of sufficiently reliable data, we did not consider what 

percentage of e-marketplace sales are used items. According to one 

e-marketplace company, about 20 percent of items listed on their site are 

used. According to information from one tax software company, the 

taxability of used items for sale varies by state.

We could not find data that listed the leading mail-order catalog 

companies, and in which states they have nexus and are collecting taxes. 

However, 116 of the companies in Internet Retailer’s 2017 Top 1000 list 

were classified by Internet Retailer as “Catalog/Call Center” companies. 

These companies had from $5 million to $5 billion in 2016 Internet sales 

to U.S. customers and were distributed similarly to the full population of 

all 1000 companies. Since we had already estimated their collection rates 

as part of our analysis on Internet retailers, we re-calculated an aggregate 

collection rate for these 116 companies. We adjusted our estimates of 

dollars currently being collected by plus (+) and minus (-) 5 percent, which 

gave us a range of overall estimated collection rates from 58 to 64

percent. 

We followed a similar approach for estimating seller collection rates for 

business-to-business e-commerce wholesalers. We identified 106 

companies on the Internet Retailer’s 2017 Top 1000 list with significant 

B2B sales. Some of the companies appeared to sell exclusively to 

businesses whereas others had both significant consumer and business 

sales. These companies had 2016 Internet sales to U.S. customers 

ranging from $5 million to $10 billion, and the subpopulation was 

distributed similar to the overall Top 1000 population. The 106 companies 

were more likely to come from Internet Retailer’s categories of: 

automobile parts, computers/electronics, hardware/home improvement, 

and office supplies. Comparatively fewer were in Internet Retailer’s 

categories of apparel/accessories, food/drug, health/beauty, or 

housewares/home furnishings. Because we had already estimated their 

collection rates as part of our analysis on Internet retailers, we 

re-calculated an aggregate collection rate for these 106 companies. We 

adjusted our estimates of dollars currently being collected by plus (+) and 

Other Remote Retailers 

Collection Rates

B2B E-Commerce Wholesalers 

Collection Rates
Appendix I: Methodology for Revenue Gain 

Estimates

Page 44 GAO-18-114 Sales Taxes

minus (-) 5 percent, which gave us a range of overall estimated collection 

rates from 85 to 94 percent.

According to data we found, consumer and business use tax compliance 

rates have not changed significantly since we did similar analyses in 

2000. As we reported then, consumer use tax rates are estimated to be 

very low whereas business use tax compliance rates are estimated to be

very high. The most widely-cited study we found on consumer use tax 

compliance was prepared by the Minnesota legislature in 2015.22 The 

study reported that for those states that allowed taxpayers to report use 

taxes on their state income tax returns, the percentage of returns 

including use taxes ranged from a low of 0.2 percent in Rhode Island to a 

high of 10.2 percent in Maine. We used the various rates from the study 

in our calculations. For those states not listed in the Minnesota legislature 

study, we used a default median rate of 1.2 percent. We had more to upto-date data for California, Mississippi, and Vermont, which we used in 

our calculations. We then adjusted the total dollar amount of use taxes 

paid by consumers from 0 to 10 percent to provide us a range of inputs 

for our model. Making these adjustments had little to no effect on the final 

results. For business use tax compliance rates, we found data from five 

states that estimated business use tax compliance to be from 70 percent 

to 90 percent. In our model, we applied both these figures to give us a 

range of estimated use tax dollars paid by businesses.

Table 5 shows the potential revenue gains for 2017 that we calculated 

using various combinations of low and high estimates for sales and 

sellers collections rates described above. Here too, we chose to not 

provide a single point estimate because the low and high scenarios for 

potential revenue gains illustrate how the many underlying uncertainties 

affect potential revenue gains.

 22Minnesota House of Representatives, “Use Tax Collection on Income Tax Returns in 

Other States,” updated 2015, www.house.leg.state.mn.us/hrd/pubs/usetax.pdf, accessed 

March 20, 2017.

The Extent to Which 

Purchasers Already Pay 

Tax

Ranges of Potential 

Revenue Gains
Appendix I: Methodology for Revenue Gain 

Estimates

Page 45 GAO-18-114 Sales Taxes

Table 5: GAO Low and High Scenario Estimates of State and Local Government 

2017 Potential Revenue Gains from Expanded Tax Collection Authority on Remote 

Sales

Dollars in billions

Low scenario 

estimate

High scenario 

estimate

Business-to-consumer (B2C)

Internet retailers 3.2 4.8

E-marketplace sellers 3.9 6.2

Other remote retailersa 1.5 1.8

(less consumer use tax compliance) (0.2) (0.2)

B2C subtotal 8.4 12.5

Business-to-business (B2B)

Merchant wholesale e-commerceb 1.0 2.9

(less business use tax compliance) (0.9) (2.0)

B2B subtotal 0.1 0.9

Total B2B + B2C 8.5 13.4

Source: GAO analysis of Forrester Research, Internet Retailer, U.S. Census Bureau, and company financial data. | GAO-18-114

Note: Totals may not sum due to rounding. These estimates are the potential revenue state and local 

governments could gain in calendar year 2017 if granted the legal authority to require all remote 

sellers to collect taxes on all remote sales.

a

Includes catalog, mail-order, call center, and television shopping channel retail companies.

b

Merchant wholesale e-commerce sales includes manufacturers’ sales branches and offices, but 

excludes agents and brokers, and excludes sales made via electronic data interchange networks.

By adjusting various model inputs we produced some lower estimates

resulting from the following assumptions and adjustments: (1) decreasing 

our estimated e-marketplace and other remote retailer sales; (2) 

increasing our estimated seller collection rate for all types of remote

sellers; (3) increasing our estimated consumer and business use tax 

compliance; and (4) increasing our estimates of tax-exempt business 

inputs (intermediate goods). The higher estimate results from: (1) 

increasing our estimated e-marketplace and other remote retailer sales; 

(2) decreasing our estimated seller collection rates for all types of remote 

sellers; (3) decreasing our estimated consumer and business use tax 

compliance rates; and (4) decreasing our estimates of tax-exempt 

business purchases (intermediate goods).
Appendix I: Methodology for Revenue Gain 

Estimates

Page 46 GAO-18-114 Sales Taxes

We lacked sufficient data on four additional factors that, if we had 

included in our model, would likely reduce our estimates of state and local 

government revenue gains.

Consumer Behavior Response

We lacked sufficient data on the extent to which requiring all remote 

sellers to collect sales taxes on all sales (regardless of a sellers’ nexus) 

would raise final prices to consumers and thus lower demand for goods 

sold remotely. Facing higher final prices, some online or other remote 

shoppers might shop instead at traditional brick and mortar retailers, or 

place orders with non-U.S. remote sellers. A representative from one 

major Internet retailer we interviewed believed that its customers placed 

higher value on the convenience of shopping online and were less likely 

to change their shopping behavior if previously untaxed sales now 

included sales taxes. Some economists have concluded that consumers 

alter buying decisions when remote retailers begin to collect sales 

taxes.23 However, one of the tax policy specialists who reviewed our 

report noted a lack of consensus on this topic.

Digital Downloads of Products

We lacked sufficient data on what portion of e-commerce sales included 

in our model might be tax exempt digital downloads of software, music, 

books, and games. Some states consider digital downloads to be a 

service (not a physical good) and therefore exempt from sales taxes. The 

variations in state laws governing the taxability of digital downloads were 

too numerous for us to reliably include in our model. Assuming that states 

do not change their laws to make these purchases taxable, it is likely that 

our estimates of potential revenue gains would be lower.

Small Seller Exemptions

We were unable to factor in the extent to which some small remote sellers 

might be exempt from sales tax collection requirements even if states had 

expanded authority over all remote sales. Recent state laws and

 23Brian Baugh, Itzhak Ben-David, and Hoonsuk Park, “Can Taxes Shape an Industry? 

Evidence from the Implementation of the ‘Amazon Tax,’” Ohio State University Fisher 

College of Business Working Paper Series, September 2016. Liran Einav, Dan Knoepfle, 

Jonathan Levin, and Neel Sundaresan, “Sales Taxes and Internet Commerce,” American 

Economic Review, 2014, 104(1): 1-26. 

Including Additional Factors in 

Our Model Would Likely Lower 

Our Overall Estimates of 

Potential Revenue Gains
Appendix I: Methodology for Revenue Gain 

Estimates

Page 47 GAO-18-114 Sales Taxes

regulations regarding taxes on remote sales have included small seller 

provisions that exempt sellers who make less than a specified dollar 

amount of sales or a number of transactions annually into a state.

Proposed federal legislation granting states expanded taxing authority on 

all remote sales also includes different nationwide dollar amount 

exemptions for small sellers.24 We could not find sufficiently reliable data 

to estimate how many businesses or what dollar volume of sales might be 

exempt either at the state or federal level. As a result, our final estimates 

most likely overstate the total potential revenue gains for some, or all, 

states depending on what types of small seller exemptions might be 

enacted at either the state or federal level, or both.

Sales to Tax Exempt Entities

We lacked sufficient data on what share of remote sales are made to tax 

exempt entities. In our 2000 report, we were also unable to identify any 

estimates of sales by taxable versus tax-exempt purchaser. Officials from 

one state revenue agency we interviewed estimated that the percent of 

purchases made by tax-exempt entities or persons to be extremely low. 

Our final estimates of potential tax gains would be lower for states if we 

had included an estimate in our model.

 24The Marketplace Fairness Act of 2017 (S. 976) includes a nationwide $1 million small 

seller exemption. The Remote Transactions Parity Act of 2017 (H.R. 2193) includes a 

small seller exemption that starts at $10 million and phases out over 3 years, but the 

exemption does not apply to small sellers who utilize an online marketplace.
Appendix II: State and Local Government 

Potential Revenue Gains

Page 48 GAO-18-114 Sales Taxes

Table 6: Estimates of State and Local Government 2017 Potential Revenue Gains 

from Expanded Tax Collection Authority on Remote Sales

Dollars in millions

Low scenario estimate High scenario estimate

Alabama 156 238

Alaska n/a n/a

Arizona 190 293

Arkansas 123 169

California 1,000 1,735

Colorado 168 262

Connecticut 128 194

Delaware n/a n/a

District of Columbia 30 44

Florida 486 758

Georgia 232 367

Hawaii 36 51

Idaho 42 60

Illinois 383 626

Indiana 168 261

Iowa 104 146

Kansas 113 170

Kentucky 93 140

Louisiana 195 288

Maine 28 41

Maryland 165 252

Massachusetts 169 279

Michigan 221 336

Minnesota 132 206

Mississippi 90 123

Missouri 180 275

Montana n/a n/a

Nebraska 67 95

Nevada 87 134

New Hampshire n/a n/a

New Jersey 216 351

New Mexico 60 88

New York 510 880

North Carolina 223 358

Appendix II: State and Local Government 

Potential Revenue Gains
Appendix II: State and Local Government 

Potential Revenue Gains

Page 49 GAO-18-114 Sales Taxes

Dollars in millions

Low scenario estimate High scenario estimate

North Dakota 34 49

Ohio 288 456

Oklahoma 157 228

Oregon n/a n/a

Pennsylvania 219 373

Rhode Island 34 48

South Carolina 132 193

South Dakota 33 47

Tennessee 237 363

Texas 763 1,232

Utah 73 113

Vermont 16 23

Virginia 188 298

Washington 298 453

West Virginia 53 74

Wisconsin 123 187

Wyoming 22 31

Total 8,466 13,387

Average 184 291

Legend: 

n/a = not applicable

Source: GAO analysis of Forrester Research, Internet Retailer, U.S. Census Bureau, and company financial data. | GAO-18-114

Note: Totals may not sum due to rounding. These estimates are the potential revenue state and local 

governments could gain in calendar year 2017 if granted the legal authority to require all remote 

sellers to collect taxes on all remote sales. Alaska, Delaware, Montana, New Hampshire, and Oregon 

do not have statewide sales taxes. Some local sales taxes exist in Alaska and Montana but we did

not have sufficiently reliable data with which to estimate these local government revenue gains.
Appendix III: GAO Contact and Staff 

Acknowledgments

Page 50 GAO-18-114 Sales Taxes

James R. McTigue, Jr. (202) 512-9110 or mctiguej@gao.gov.

In addition to the contact named above, Tara Carter (Assistant Director), 

Mark Kehoe (Analyst in Charge), Brett Caloia, and Christine N. Dickason 

made key contributions to this report. Anne Stevens, A.J. Stephens, 

Cynthia Saunders, JoAnna Berry, Stewart W. Small, Donna Miller, 

Andrew Emmons and Andrew Howard also provided key assistance.

Appendix III: GAO Contact and Staff 

Acknowledgments

GAO Contact

Staff 

Acknowledgments

(101139)
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