Opinion Editorial | |
| Wednesday, September 15, 1999 | |
Complications & Costs Of Taxing Internet Sales |
This week, the Advisory Commission on Electronic Commerce will hold its second meeting in New York. The commission was established by Congress to resolve the question of how internet sales should be taxed. Congress feared that state and local governments might kill internet commerce in its infancy with discriminatory taxes, and imposed a moratorium on such taxes that expires next year. Meanwhile, state and local governments fear erosion of their tax bases if large numbers of people are able to avoid paying sales taxes on internet sales.
Part of the problem that the commission must wrestle with is the vast complexity of state and local sales tax rates and bases. According to two new studies by the accounting firm of Ernst & Young and the National Tax Association, 46 states impose general sales taxes and 34 of them allow local governments to impose such taxes as well. Altogether, 7,600 jurisdictions across the country impose some form of sales tax on purchases.
Furthermore, there are probably no two jurisdictions that tax exactly the same goods the same way. In New York, for example, big marshmallows are taxable while small ones are not, because the former are considered to be candy while the latter are food. Sorting through this mess of contradictory taxes bases and thousands of different tax rates already imposes a significant burden on business that will rise as e-commerce becomes more extensive.
According to Ernst & Young, small in-state retailers already bear a heavy burden of collecting sales taxes, amounting to 7.2 percent of taxes collected. Costs tend to fall as sales rise, because they are fixed and can be spread over a larger number of sales. However, businesses engaged in interstate commerce see a significant rise in compliance costs, due to the complexity of dealing with multiple sales tax systems. For a large seller engaged in sales in 15 different states, Ernst & Young estimate the compliance cost at 8.3 percent of taxes collected.
E-commerce potentially increases these costs enormously, because they allow even small retailers to operate in all 46 states with sales taxes. For a large firm operating in every state, the compliance cost rises to 14 percent. For medium retailers the cost reaches 48 percent, and on small retailers the burden is an amazing 87 percent of taxes collected. In other words, it can cost a small retailer 87 cents to collect $1 of sales taxes.
One of the constraints on internet taxation is the Supreme Court, which has ruled in several cases that out-of-state sellers are only obliged to collect sales taxes if they have operations in that state. Thus a seller in Indiana with no physical presence in Michigan would not be required to collect Michigan sales taxes on a mail order, telephone or internet sale to someone in Michigan.
States get around this constraint by imposing what are called use taxes. This is a tax exactly equal to the sales tax that is imposed upon their residents who make out-of-state purchases. In theory, every time someone drives across the state line to make a purchase and bring it back to his residence, he or she owes tax on that purchase to their home state. The important point about use taxes is that they are imposed on the buyer, not the seller. Consequently, in practice almost no one actually pays use taxes.
Advocates of expanding the state's taxing power believe that tax complexity can easily be dealt with by technology. A new study from the liberal Progressive Policy Institute explains how free software could solve the problem. It will be up to the Commission to decide if that is actually the case.
Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, September 14, 1999.
For National Tax Association study
http://ntanet.org/ecommerce/final.pdf
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.
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