Tax Policy

Internet Complicates Sales Tax Collection

The Internet Tax Freedom Act, introduced by Sen. Ron Wyden (D-Ore.) and Rep. Christopher Cox (R-Calif.) would impose a moratorium on any new state and local taxes that specifically target the Internet or electronic commerce. Analysts say it attempts to address the increasingly complex system of electronic commerce, and state and local government attempts to collect taxes in such a system.

  • For instance, Texas claims tax jurisdiction over any online purchase if any part of the transaction flows through telecommunications lines or servers in Texas.

  • Thus, if a shopper in one state makes an online purchase from the web site of a company in another state, the transaction would be taxed in Texas if any portion of their electronic exchange of information passed through the state.

  • Not even mail order works this way, and the type of taxes Texas is trying to impose are probably unenforceable.

However, electronic commerce may erode the tax base of many of the nation's 30,000 tax jurisdictions, say observers. For example,

  • Barnes &Noble has book stores in 46 states and collects sales taxes in all but five of them.

  • Its online archrival, Amazon.com, has no bookstores, and only one physical presence -- an office in Seattle where it maintains its web servers.

  • Amazon.com collects no sales tax, and thus has a built-in price advantage.

  • In response, Barnes & Noble has split off its online business into a separate company and now only collects sales tax on electronic purchases in New York and New Jersey -- where it has offices -- and Virginia, where its web servers are located.

Analysts say the Internet may be one more reason for fundamental tax reform -- at the national, state and local levels.

Source: Kent Lassman (Citizens for a Sound Economy Foundation) and Richard F. O'Donnell (Center for the New West), "Internet poses taxing puzzle," Denver Business Journal, December 8, 1997.

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