NCPA - National Center for Policy Analysis

A Federal Tax On Internet Sales?

August 20, 1999

Last year, Congress enacted a three-year moratorium on taxing Internet commerce in order to give the Advisory Committee on Electronic Commerce time to create a policy for the years after 2001, when the moratorium expires. Even though the states have large budget surpluses, governors and local officials are concerned over their inability to collect taxes on sales over the Internet.

  • Dallas Mayor Ron Kirk, a member of the commission, complained that the moratorium is a threat to the nation's public education system.
  • Washington Gov. Gary Lock warned that not taxing Internet sales threatens to "undermine our efforts to educate the next generation of workers."
  • Yet the accounting firm of Ernst & Young estimates that nationwide lost tax revenue will only be about $170 million -- not quite one-tenth of 1 percent of state and local government sales and use tax collections.
  • Because of the difficulty of enforcing collections at the state level, Kirk and Utah Gov. Michael Leavitt are suggesting that the federal government impose a tax on Internet transactions -- presumably so that the proceeds would be divided up between state and local governments.

But such a federal tax would produce its own set of enforcement problems, policy experts point out. If a retail business is set up in Mexico, say, or the Cayman Islands, how do you force it to collect a tax on sales to California or North Dakota? Is it practical or cost effective for government to go after the buyer in California or North Dakota?

Thus new technologies are creatingdifficulties for tax-and-spend policies.

Source: Pete du Pont (National Center for Policy Analysis), "Tax Sales on the Internet?" Washington Times, August 20, 1999.


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