Opinion Editorial

Wednesday, June 30, 1999  

The Taxing Question Of Internet Sales

Last week, the Advisory Commission on Electronic Commerce held its first meeting in Williamsburg, Va. The Commission was established by Congress in October to review the problem of taxes and the Internet. Congress was concerned that the states were threatening to kill Internet commerce in its infancy by imposing excessive taxes on such commerce. On the other hand, states are concerned that Internet sales will seriously erode sales tax receipts, their single largest revenue source. The issue will need to be resolved before 2001, when a 3-year moratorium on Internet taxes expires.

The stakes are large and growing daily.

  • According to Forrester Research, total Internet sales amounted to $43.1 billion last year and will more than double to $109.3 billion in 1999.

  • Growth is expected to virtually double again almost yearly, and by 2003, Internet commerce is projected to equal $1.3 trillion.
Not all of such sales would be taxable even without the moratorium. Business-to-business sales, for example, would ordinarily be tax-exempt, so as to avoid double taxation. And most states exempt various goods and services from sales taxes.

  • Thus the accounting firm Ernst and Young estimates that there were only $2.6 billion of total Internet sales that were subject to state sales taxes that were not paid in 1998.

  • The avoidance of such taxes cost state governments $170 million in lost revenue.

  • However, economist Austan Goolsbee estimates that if all state taxes had applied to Internet sales, such sales would have fallen by 25 percent to 30 percent.

The basic problem is the same one states have been grappling with for decades; namely, how does a state tax out-of-state purchases, especially mail-order sales? In theory, every time consumers buy a book from Amazon.com or a sweater from Land's End they owe use taxes equal to the sales tax in the state in which they reside. Some mail order companies make an effort to collect such taxes and remit them to the state where their customers live, but many more do not. In practice, it is almost impossible for states to collect such taxes. The Internet simply magnifies this problem.

States are not the only ones that are distressed. National governments are also worried about revenue loss from Internet sales. This is not a serious problem in the U.S., which has no national sales tax. But for almost every other major country it is a matter of great concern, because they have value-added taxes at high rates providing a large and growing share of central government revenues. Although efforts are being made to tax cross-border sales, there are limits to what can be done. Many Canadians, for example, get mail boxes in the U.S. and have their purchases sent there, which they then carry across the border tax-free. And the taxation of software and music, which can be delivered over the internet, are literally impossible to tax.

In the future, growing numbers of goods and services can also be delivered over the Internet free of tax. Already, many consumers buy airline tickets that are paperless and need not even be mailed to travelers. Financial, legal and even medical services -- all potentially taxable -- are also increasingly being delivered over the Internet. Indeed, the Internet itself is potentially a taxable service. But how can it be taxed when the service provider may be in a different state or even a different country?

All of these are issues the Commission must resolve by April, 2000, when it must report to Congress. The stakes are large for states and burgeoning Internet sellers. The wrong move could kill a goose just starting to lay golden eggs.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, June 30, 1999.

For Forrster Research study http://www.forrester.com

For Ernst and Young study http://www.ey.com

For Goolsbee study http://www.nber.org/papers/w6863

The National Center for Policy Analysis is a public policy research institute founded in 1983 and internationally known for its studies on public policy issues. The NCPA is headquartered in Dallas, Texas, with an office in Washington, D.C.

For more information:
Julie Hillrichs, Dallas, TX 972-386-6272
Sean Tuffnell, Dallas, TX 972-386-6272
 Joan Kirby, Washington, DC 202-220-3082
 Internet: http://www.ncpa.org

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