NCPA - National Center for Policy Analysis

Is The Sales Tax Obsolete?

March 24, 2000

Historically the vast bulk of goods and services people consumed were purchased in the immediate vicinity, so a sales tax made sense. However, two developments are altering the basic assumption on which the sales tax rests, says Pete du Pont, former governor of Delaware and policy chairman of the National Center for Policy Analysis. Those developments are the growth of sales over the Internet -- e-commerce -- and the growing share of output that is in the form of services, rather than physical goods.

  • Goods can not only be ordered over the Internet, they can actually be delivered through the Internet itself, such as software, music and airline tickets.
  • Even if some sort of national sales tax could be implemented, Internet sellers would simply move offshore.
  • There is also a shift away from goods -- the principal base of sales taxes -- toward services, which are more difficult to tax because there is no invoice trail for auditors to follow.

Should there be any sales tax? There are several reasons for doing away with it, says du Pont:

  • States without sales taxes gain economically; Oregon, for example, is already outpacing states with sales taxes as the location of choice for Internet merchandisers.
  • Elimination of a state sales tax may induce businesses to locate in a state, where taxes on business and its employees will eventually exceed the lost sales tax revenues.

Consumers worldwide would turn increasingly to U.S. sources to download music, software and other Internet goods, says du Pont, since sales in most industrialized countries have a national sales tax tacked on or a high value-added tax hidden in the price of goods sold to consumers.

Source: Pete du Pont (Policy Chairman, NCPA), "Taxing the Internet," testimony before the Advisory Commission on Electronic Commerce, Dallas, Texas, March 20, 2000.


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