NCPA - National Center for Policy Analysis

Hot Debate Over Internet Taxation

June 22, 1999

On Monday, the federal Advisory Commission on Electronic Commerce held its first meeting determine what recommendations it will make to Congress concerning taxation of Internet purchases. The 19-member panel -- comprised of federal, state and local officials and representatives of the private sector -- is scheduled to submit its report by April 2000.

Sales taxes are not collected now, due to a three-year moratorium imposed by Congress, expiring in October 2001. The moratorium riles state and local officials -- as well as traditional retailers who claim they are losing sales to their Internet rivals. Internet merchants claim imposing taxes could stifle Internet growth and drive Internet firms overseas.

  • Complicating the debate is the fact that there are now more than 3,000 state and local sales taxes which governments count on for 36 percent of their revenues.
  • Internet consumer sales were about $10 billion last year, but are expected to top $100 billion by 2003.
  • Business-to-business sales were $43 billion last year and could amount to $1.3 trillion in 2003.
  • The percentage of retailers selling over the Internet grew from 12 percent in 1997 to 39 percent last year -- but their Internet sales represented less than 1 percent of the $3 trillion retail industry.

The Constitution prevents states from taxing transactions beyond their borders. The Supreme Court has ruled that states cannot require out-of-state companies to collect sales taxes unless Congress passes a law allowing them to do so.

Source: Richard Wolf, "Billions of Dollars Hang Over Internet Tax Debate," USA Today, June 22, 1999.


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