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to Collecting Taxes in the Cyberage: An OverviewFrom Collecting Taxes in the Cyberage
p. 11-16, published 1999
We present data in this chapter about who is making online purchases in Kentucky and explore the factors that might help explain the probability of knowledge of the use tax and willingness to pay it. We also examine Internet access and usage, a necessary precondition for making an online purchase. This chapter lays a foundation for evaluating the findings presented in the following chapters.
One recent study conducted by the National Telecommunications & Information Administration (NTIA) found that Americans are becoming increasingly interconnected in the wired community.(1) As illustrated in Figure 1, the percentage of U.S. households with computers and Internet access increased rapidly from 1994 to 1998. (2)
Figure 1: Percent of U.S. Households with a Computer and Internet Access, 1994, 1997, and 1998
Kentucky is competitive with neighboring states with respect to the percentage of households with Internet access (Figure 2).(3) And two statewide surveys conducted for the Kentucky Long-Term Policy Research Center by the University of Kentucky Survey Research Center find that, like most U.S. households, citizens of the Commonwealth are moving rapidly into the Information Age.(4) While access to computers has only inched upward over the past few years, Internet exploration has soared.
Figure 2: Estimated Percent of U.S. Households with Home Internet Access in 1998, for Selected States
Internet use in Kentucky has increased significantly over the past two years. In 1996, we found that about 26 percent of adults in Kentucky had used the Internet in the past year.(5) In 1998, rates of Internet access had increased to 41.8 percent.(6) Three years ago, we found that younger people and more educated people were the most likely to have used the Internet. While that remains true today, Internet use has soared at all age and education levels. Moreover, regional disparities in Internet use have virtually disappeared, with the exception of eastern Kentucky, which continues to lag behind the rest of the state (Figure 3). Low Internet use in eastern Kentucky may be explained by lower rates of home computer ownership. Computer users at home are more likely to have accessed the Internet than computer users at work, school, or elsewhere.
Figure 3: Percentage of Adults in Kentucky Who Have Accessed the Internet, by Region
Currently, the data suggest that Kentuckians are accessing the Internet at rates just below the national average. However, as Internet access and usage in Kentucky increases, Kentuckians will likely become more fully integrated into the digital economy. In the sections below, we present survey data about who is making online purchases in Kentucky and explore the factors that might help explain the probability of knowledge of the use tax and willingness to pay it.
An estimated 17.7 percent of Kentucky adults said “Yes” when asked, “Have you ever purchased a product over the Internet?”(7) This is somewhat lower than our estimated U.S. average of around 25 percent.(8)
Who are these cybershoppers? A Kentuckian shopping on the web is most likely a college-educated male, earning at least $50,000 annually, and living in the urban triangle.(9) Table 1 shows some of the demographic characteristics of online purchasers in Kentucky.
Table 1: Have you ever purchased a product over the Internet? (Percent Answering Yes, by Demographic Category)
Total online retail spending in the United States in 1999 is estimated to be about 10 times the size it was just a few years ago. According to at least one source, consumer purchases on the Internet were about $1.8 billion in 1997, $8 billion in 1998, and $18.6 billion in 1999.(10) And already, 22 percent of the online community can envision doing most of their shopping online in the future.(11)
A lot of money is being spent online now, and it is likely that even more will be spent in the future. So, who knows about the use tax and who pays it? The following questions were asked on the University of Kentucky Survey Research Center’s spring 1999 survey:
If you make Internet or catalogue purchases from out-of-state companies, Kentucky law requires that you pay Kentucky sales tax. If the company does not collect Kentucky sales tax, it is your responsibility to report the purchase on your state income tax form and pay the 6 percent tax. This is called the use tax. Have you heard of this law?
(YES or NO)If you were to make Internet or catalogue purchases from out-of-state companies that did not collect Kentucky sales tax, how likely is it that you would report those purchases on your state income tax form?
(VERY LIKELY, SOMEWHAT LIKELY, SOMEWHAT UNLIKELY, VERY UNLIKELY).Only 37 percent of Kentuckians say that they have heard of the use tax.(12) And when asked to give the likelihood of actually reporting the use tax, we find that 35.8 percent said “Very Likely,” 18.5 percent replied “Somewhat Likely,” 14.3 percent said “Somewhat Unlikely,” 29.6 percent replied “Very Unlikely,” and 1.8 percent said that they did not file state income tax.(13)
These survey results show that about 54 percent indicated that they are either very or somewhat likely to pay the use tax. However, these individuals are probably overly optimistic about their likelihood of paying the use tax. For example, a recent report conducted by Ernst & Young assumes that only “4 percent of taxable business-to-consumer e-commerce sales result in sales and use tax payments.”(14)
Nevertheless, it would seem that additional efforts to educate the public about the use tax might result in a higher compliance rate. First, almost two thirds of the public do not know about the requirement to pay the use tax. Obviously, individuals won't pay a tax that they do not know about. Second, as Figure 4 illustrates, individuals who say they have heard about the use tax are more likely to say they will pay it. For example, of those individuals who say they are very likely to pay the use tax, 47 percent have also heard of the use tax, where 30 percent have not. Conversely, those who say that they are very unlikely to pay the use tax have less familiarity with the tax.
Figure 4: Linking the Likelihood One Would Pay the Use Tax With Whether One Had Previously Heard of It
We used a statistical model to estimate the effect of a series of variables on the probability that an individual would report being very or somewhat likely to pay the use tax. For example, are individuals in urban Kentucky more or less likely than those living in rural areas to pay the use tax? Are individuals in households with higher income levels more or less likely to indicate a willingness to pay the tax? And what effect do education, gender, and age have on their expressed willingness to comply with the use tax law? This kind of analysis enables us to estimate the effect of any one variable, like income level, on the probability of an individual’s expressed willingness to comply with the use tax requirement, while holding all other variables constant. For example, the model enables us to take two individuals living in an urban area with the same gender, age, and education and estimate the effect of income level on the probability of complying with the use tax law.(15)
Figure 5 illustrates two of the more interesting results of the statistical analysis. First, individuals who had previously heard of the use tax have a higher probability of reporting that they are either very or somewhat likely to pay the use tax (while holding all other variables constant). Second, as an individual’s income increases, the probability they would indicate a willingness to comply with the use tax law decreases. We also find statistically significant relationships between willingness to pay the use tax and education level, as well as living in an urban area. More educated individuals and those living in rural areas have a higher probability of reporting that they are very or somewhat likely to pay the use tax.
Figure 5: Estimated Relationship Between Income and Probability of Being Very or Somewhat Likely to Pay the Use Tax by Familiarity of the Tax
Kentucky consumers will be making an increasing percentage of their expenditures on the Internet in the future. As more Kentuckians shop online, policymakers will be challenged to develop new and better ways to increase the use tax compliance rate. While these survey results show that over half of Kentuckians say that they are very or somewhat likely to pay their use tax, other research suggests that no more than 16 or 17 percent of the use tax owed nationally is actually paid.(16)
Educating consumers about the use tax could be a good first step. A significant percentage, about 63 percent, does not even know about the requirement to pay the use tax. And our analysis shows that consumers who have heard about the use tax have a much higher probability of indicating they are either very or somewhat likely to comply with the use tax requirement.
Finally, the results presented in this chapter also suggest that tax reform might be in Kentucky’s future. First, if online purchases continue to increase while use tax compliance remains low, the sales and use tax base will gradually erode. Consequently, other sources of revenue will have to be found, or state expenditures will have to be adjusted accordingly. Second, the use tax is regressive, since individuals with higher incomes appear to be less likely to comply with the use tax requirement.
In the next two chapters, we present alternative scenarios for online purchases in Kentucky and discuss the implications for future revenue collections. The data and analysis presented in this chapter should provide a useful context for evaluating the plausibility of those projections and scenarios.
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Michael Childress is the Executive Director of the Kentucky Long-Term Policy Research Center. He received a Bachelor of Arts degree from the University of Kentucky in 1984 and a Master of Arts degree from the University of California, Los Angeles, in 1986-both in political science. From 1988 to 1993, he was a social scientist at the RAND Corporation in Santa Monica, California. While at RAND, he authored numerous studies on topics ranging from demographic trends in the third world to the implications of declining budgets for the U.S. Army. In August of 1993, he became the first executive director of the Kentucky Long-Term Policy Research Center, where he oversees the Center’s numerous research activities. Return to text.
National Telecommunications & Information Administration (NTIA), Falling Through The Net: Defining the Digital Divide (U.S. Department of Commerce, Washington, DC, 1999): online, NTIA Web site, http://www.ntia.doc.gov/ntiahome/fttn99/contents.html, accessed on 2 Dec. 1999. Return to text.
The data presented from the NTIA are household-level data. The data presented from the University of Kentucky Survey Research Center are individual-level data. Consequently, the two sources of data cannot be compared. Return to text.
Due to sampling error, there is no statistically significant difference (at alpha level .10) among any of the states listed in the figure. Return to text.
The 1996 survey was conducted from May 5 until June 5, 1995. Households were selected using random-digit dialings, a procedure giving every residential telephone line in Kentucky an equal probability of being called. The sample includes 629 noninstitutionalized Kentuckians 18 years of age or older. The margin of error is slightly less than 4 percentage points at the 95 percent confidence level. Calls for the 1998 survey were conducted from May 11 until June 10, 1998. The sample includes 658 noninstitutionalized Kentuckians 18 years of age or older. The margin of error is approximately ± 3.8 percentage points at the 95 percent confidence level. Return to text.
These data are on Kentucky adults instead of Kentucky households. Therefore, the percentages in Figure 3 are not comparable to the NTIA data on households, which are presented in Figures 1 and 2. Return to text.
Estimates of Internet use for both 1996 and 1998 are age and education adjustments of the raw numbers. The raw rates of use were 25.6 percent in 1996 and 40.6 percent in 1998. Return to text.
The raw percentage is 17.7, but women are overrepresented in this sample. Women constitute 57 percent of the sample, but only about 51.5 percent of the actual population in Kentucky. If we adjust the results to reflect this oversampling of women, the percentage of Kentucky adults who have made a purchase on the Internet increases to 18.2 percent. It increases because men are more likely to make a purchase on the Internet. Using population estimates from 1995, we used the following formula to calculate the weighted average: 18.2 = (13.57 * .5146) + (23.16 * .4854), where 13.57 percent of women have made an online purchase and 23.16 percent of men have. The survey was conducted by the University of Kentucky Survey Research Center. Households were selected using random-digit dialing, a procedure giving every residential telephone line in Kentucky an equal probability of being called. Calls were made from July 15 until August 12, 1999. The sample includes noninstitutionalized Kentuckians 18 years of age or older. There were 633 completed interviews. The margin of error is approximately ±3.9 percentage points at the 95 percent confidence level. Return to text.
The National Telecommunications &
Information Administration estimates that in 1998 32.7 percent of U.S. persons (15
years-old and older) had used the Internet from any location. Available online at http://www.ntia.doc.gov/ntiahome/fttn99/InternetUse_II/Chart-II-1.html
Using a logistic regression model, we find statistically significant relationships between the probability of buying something online and education (alpha = .05), income (.05), gender (.10), age (.05), and urban location (.05). Return to text.
Accessed at
Accessed at
http://www.portraitofamerica.com/html/poll-377.html
Sample size = 630. Return to text.
Sample size = 595. Return to text.
Robert J. Cline and Thomas S. Neubig, “The Sky is not Falling: Why State and Local Revenues were not Significantly Impacted by the Internet in 1998,” (Ernst & Young Economics Consulting and Quantitative Analysis, 1999): 7. The U.S. Advisory Commission on Intergovernmental Relations reports a higher rate of 16.5 percent in Taxation of Interstate Mail Order Sales: 1994 Revenue Estimates. Return to text.
We used a cumulative logit model for ordinal responses. Refer to Appendix A for parameter estimates and predicted probabilities. Return to text.
The U.S. Advisory Commission on Intergovernmental Relations reports a rate of 16.5 percent in Taxation of Interstate Mail Order Sales: 1994 Revenue Estimates. Return to text.