NCPA - National Center for Policy Analysis

Governors' Internet Sales Tax Plan

February 18, 2000

"Substantial changes are necessary if the sales tax is to continue as an integral part of the state and local revenue system," warns the National Governors' Association in "A Streamlined Sales Tax System for the 21st Century," its plan for taxing Internet sales.

The NGA's plan aims to collect and remit sales and use taxes owed on Internet transactions. Under the existing system, businesses collect and remit sales taxes if they have a physical presence or nexus in the state where the buyer resides; if the business is out-of-state, the buyer may be responsible for paying the state a use tax -- though few do.

  • The NGA says sellers would be relieved of the burden of collecting sales taxes by independent private-sector entities ("Trusted Third Parties") that would calculate and collect the taxes using computer software.
  • The states would get the sales tax and use tax revenue they now lose on electronic commerce.
  • The states would develop a system of uniform product classification and harmonize other state tax policies through multi-state compacts to ensure that the system worked nationwide.
  • Eventually, the plan would be extended to cover mail order catalog sales and more traditional "bricks-and-mortar" retail sales.

Ernst & Young tax economists Robert J. Cline and Thomas S. Neubig say "the complex system of unique sales and use taxes in 46 different states and almost 7,500 local governments imposes significant compliance cost burden on retailers."

"For firms selling nationally with collection responsibilities in all 46 states, the compliance costs range from 14 percent of sales tax collected for large retailers, to 48 percent for medium retailers, and 87 percent for small retailers."

However, the NGA's plan has been criticized on constitutional, economic and practical grounds.

Source: "Streamlined Sales Tax System for the 21st Century," National Governors' Association, November 1999; Adam D. Thierer, "The NGA's Misguided Plan To Tax The Internet And Create A New National Sales Tax," Backgrounder No. 1343, February 4, 2000, Heritage Foundation, 214 Massachusetts Avenue, N.E., Washington, D.C. 20002, (202) 546-4400.


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