NCPA's du Pont: Internet Will Help Kill Sales Tax

DALLAS (March 20, 2000) -- The real question before the advisory commission on electronic commerce is not whether or how to apply state and local sales taxes to online commerce, but whether the sales tax can or should survive in an Internet world.

So argues Pete du Pont, former Delaware Governor and current Policy Chairman of the Dallas-based National Center for Policy Analysis (NCPA SM) in testimony submitted to the Federal Advisory Commission on Electronic Commerce as it met this week in Dallas.

"Rather than fight to make the sales tax effective, perhaps we should recognize that the sales tax might no longer make economic sense," urged du Pont.

In his groundbreaking testimony, du Pont pointed out that since historically the bulk of goods and services people consumed were purchased in their immediate vicinity, a sales tax made economic sense. However, two major developments involving the Internet threaten the viability of imposing a sales tax:

  • People can now order goods and services over the Internet and have them delivered to their homes, or increasingly, delivered through the Internet itself. This empowers consumers to make purchases outside their own jurisdiction.
  • The focal point of today's economy is shifting away from goods and towards services, which most states currently exempt from sales taxes with few exceptions.

"The Digital Age, the Internet, and the knowledge economy are rapidly accelerating economic changes that have been under way for years that make the future of the sales tax bleak," du Pont said. "So instead of trying to patch together something with difficult constitutional challenges that run counter to a substantial technological shift and a significant change in consumer purchasing habits to try to keep it alive for a few more years, why not embrace the future and simply get rid of the sales tax altogether?"

The commission chaired by Virginia Gov. Jim Gilmore was formed to make a recommendation on whether electronic commerce should be subject to taxation, and if so, how. Du Pont's testimony for the first time broaches the subject of whether the new economy is beginning to render the sales tax obsolete.