NCPA - National Center for Policy Analysis

The Internet Challenges State Sales Taxes

April 7, 2000

The Internet and the knowledge economy are accelerating economic changes that make the long-term future of the sales tax bleak. That is the conclusion of some tax policy experts. While the current debate centers on whether and how Internet sales should or could be taxed, the real question concerns the future viability of sales taxes in an online world.

  • Experts warn that it is impossible to tax goods -- ranging from software, music and airline tickets to stocks -- that can be purchased over the Internet.
  • Business-to-business sales are always free of state sales taxes and sales of stocks and airline tickets are tax-exempt under current law in every state -- which are the fastest growing categories of Internet sales.
  • Moreover, the economy is shifting from providing goods toward services -- and because taxation of services is not viable, most states don't even try to tax them.
  • Even if some sort of national sales tax could be implemented that encompassed all domestic sellers, sales would simply shift offshore.

Given these considerable obstacles, analysts reason, sales taxes are eventually doomed. The process won't occur overnight, but nothing is going to keep the sales tax from eroding more and more as time goes by.

To cushion the revenue blow, states have some options. They could privatize and contract out services -- thereby reducing costs. They could shift toward fee-based, rather than tax-based, government services. And they could use the Internet to lower the costs of delivering government services -- in area such as registering cars, paying taxes and purchasing supplies.

Source: Pete du Pont (National Center for Policy Analysis), "End of the Sales Tax Road?" Washington Times April 7, 2000.


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