NCPA - National Center for Policy Analysis

The Sales Tax Is Obsolete In The Internet Age

May 10, 2000

The House is scheduled to consider extending the tax moratorium on Internet access for five more years. Contrary to popular belief, the moratorium does not prevent states from taxing purchases over the Internet. They are currently taxable in all states with a sales tax and will continue to be so even if the moratorium is extended.

However, the Supreme Court has ruled that businesses need not withhold sales taxes on out-of-state sales when those businesses do not have a physical presence in that state. Thus the problem of taxing Internet sales is the same problem states have had for decades with catalogue and mail order purchases.

The National Governors Association has lobbied strenuously for federal legislation to allow states to tax out-of-state sales. Rather than try to make the sales tax effective, the governors should think about abolishing their sales taxes altogether. In the May issue of "Ideas on Liberty," economists Richard Ault and David Laband of Auburn University argue the Internet has rendered the state sales tax unviable.

This is also the view of economist Hal Varian, the nation's leading authority on the economics of the Internet. He argues the sales tax should be replaced with a consumed income tax.

Murray Weidenbaum, chairman of President Reagan's Council of Economic Advisers, says a consumed income tax is far better suited than the sales tax for taxing Internet sales. An income tax with no taxation of savings is a tax on consumption, just like a sales tax. But unlike a sales tax, a consumed income tax need not be applied to each sale. Hence, it achieves the same purpose with much less complexity.

Sales tax supporters need to accept the fact that the sales tax is dead. Instead of trying to make this obsolete tax viable, they should bury it for good.

Source: Bruce Bartlettt, senior fellow, National Center for Policy Analysis, May 10, 2000.


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