GAO-02-83R Update on e-Commerce Revenue Losses

United States General Accounting Office

Washington, DC 20548

November 6, 2001

The Honorable Max Baucus, Chairman

The Honorable Charles E. Grassley

Ranking Minority Member

Committee on Finance

United States Senate

Subject: Update on State and Local Revenue Loss From Internet Sales

As you requested, we have examined the Census Bureau’s estimates of e-commerce

in 19991

 to determine whether they would provide a basis for us to revise any of the

results we presented in our 2000 report on sales tax losses from e-commerce.2

 In that

report, we used a range of available private-sector forecasts of Internet and total

remote sales as the basis for several scenarios illustrating the impact of such sales on

state and local sales and use tax revenues. The scenarios showed that there is

considerable uncertainty about the size of the impacts and how various assumptions

about sales, compliance, and other factors contribute to that uncertainty. The

purpose of this letter is to present our conclusions from a review of the Census

estimates.

In summary, we found that Census’ new e-commerce estimates do not provide a basis

for revising the results in our 2000 report. Census’ definition of e-commerce is

broader than Internet sales.3 Because of the way firms provided information on their

e-commerce sales to Census, Internet sales cannot be separated from the broader ecommerce sales at a level of detail that allows us to compare Census’ results with the

Internet sales estimates we used in our report.

In our 2000 report, we made a distinction between sales by businesses to other

businesses and sales by businesses to individual consumers. Private-sector

forecasters typically estimate these two categories of sales separately. The Census

Bureau also makes separate estimates for broad categories of e-commerce. Census’

estimate for manufacturers’ value of e-commerce shipments is its estimate that is

closest in concept to the estimates of business-to-business Internet sales that we used

 1

See “1999 Multi-sector report,” E-Stats, (Mar. 7, 2001), www.census.gov/estats. 2

See Sales Taxes: Electronic Commerce Growth Presents Challenges; Revenue Losses Are Uncertain

(GAO/GGD/OCE-00-165, June 30, 2000).

3

“The Census Bureau’s e-commerce measures report the value of goods and services sold online

whether over open networks such as the Internet, or over proprietary networks running systems such

as Electronic Data Interchange (EDI).” (See E-Stats (Mar. 7, 2001) www.census.gov/estats.) The

Internet sales estimates we used in our 2000 report covered only sales transacted over the Internet.
Page 2 GAO-02-83R Update on e-Commerce Revenue Losses

in our report. Census’ estimate of retail e-commerce is closest in concept to the

estimates of business-to-consumer Internet sales that we used.

We cannot use Census’ estimate for manufacturers’ value of e-commerce shipments

in 1999 to revise the business-to-business Internet sales estimates that we used for

the scenarios in our report. The Census estimate includes transactions completed

over Electronic Data Interchange networks, which have been widely used for years

and were in use before the recent growth in Internet commerce. EDI can involve

transactions over the Internet, but a large volume of EDI takes place over proprietary

networks. Firms that responded to a Census questionnaire concerning e-commerce in

1999 did not report separate values for EDI transactions and Internet transactions.

The respondents reported total on-line sales and indicated which type of computer

network they used most frequently, but they did not provide a percentage distribution

of sales that corresponded to the various networks. Moreover, Census’ e-commerce

estimates are disaggregated by broad manufacturing sectors. The estimates of

Internet sales that we used in our 2000 study were reported at a different level of

detail. We are unable to aggregate our 2000 estimates in a manner that would permit

a comprehensive and accurate comparison to the Census estimates.

Census’ new estimate of retail e-commerce does not provide a reason for us to revise

the range of revenue loss scenarios that we presented in our 2000 report. The

difference between Census’ estimate and the high-end estimate that we used in our

report is small relative to the margins of error associated with many of the

assumptions that we needed to use in that study.4

 Census estimates that U.S. retailers

sold about $27.3 billion in goods and services on-line in 2000. This number is higher

than the $24.8 billion figure that we used for the higher scenario in our study.

However, the Census estimate includes export sales and sales by retailers to other

businesses, which were not included in the sales estimates that we used and which

would not be part of the U.S. business-to-consumer sales tax base that we were

estimating. If the exports and sales to businesses were excluded from the Census

estimate, it is likely that the estimate would not be significantly above the value that

we used.

We based our conclusions in this letter on a comparison of the documentation for

Census’ e-commerce estimates and for Forrester Research’s estimates of business-toconsumer and business-to-business Internet sales that we used in our 2000 report. We

discussed the differences between Census’ and Forrester’s estimates with individuals

who were involved in preparing both sets of estimates.

The Department of Commerce reviewed a draft of the correspondence and had no

changes to suggest. We conducted our audit work in accordance with generally

accepted government auditing standards between August and September 2001.

As arranged with your offices, unless you publicly announce its contents earlier, we

plan no further distribution of this report until 30 days after the date of this letter. At

 4

The fact that Census includes EDI in its definition of e-commerce does not have significance for this

comparison of business-to-consumer sales estimates because EDI occurs between businesses, not

between businesses and individual consumers.
Page 3 GAO-02-83R Update on e-Commerce Revenue Losses

that time we will be sending copies of this letter to interested congressional

Committees and the Director, Bureau of the Census. The letter will also be available

on GAO’s home page at www.gao.gov.

If you have any questions, you may contact Jim Wozny or me at (202) 512-9110. In

addition, Demian Moore and Tara Carter made key contributions to this letter.

Sincerely yours,

James R. White

Director, Tax Policy

 and Administration Issues

(440082)