NCPA - National Center for Policy Analysis

The Taxing Question Of Internet Sales

June 30, 1999

Last week, the Advisory Commission on Electronic Commerce held its first meeting in Williamsburg, Va. The Commission was established by Congress in October to review the problem of taxes and the Internet. The issue will need to be resolved before 2001, when a 3-year moratorium on Internet taxes expires.

  • According to Forrester Research, total Internet sales amounted to $43.1 billion last year and will more than double to $109.3 billion in 1999.
  • Growth is expected to virtually double again almost yearly, and by 2003, Internet commerce is projected to equal $1.3 trillion.

Not all of such sales would be taxable even without the moratorium. Business-to-business sales, for example, would ordinarily be tax-exempt, so as to avoid double taxation. And most states exempt various goods and services from sales taxes.

  • Thus the accounting firm Ernst and Young estimates that there were only $2.6 billion of total Internet sales that were subject to state sales taxes that were not paid in 1998.
  • The avoidance of such taxes cost state governments $170 million in lost revenue.
  • However, economist Austan Goolsbee estimates that if all state taxes had applied to Internet sales, such sales would have fallen by 25 percent to 30 percent.

The basic problem is the same one states have been grappling with for decades; namely, how does a state tax out-of-state purchases, especially mail-order sales? In practice, it is almost impossible for states to collect such taxes. The Internet simply magnifies this problem.

The Commission must resolve the issues involved by April 2000, when it must report to Congress. The stakes are large for states and burgeoning Internet sellers. The wrong move could kill a goose just starting to lay golden eggs.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, June 30, 1999.

For Forrster Research study

For Ernst and Young study


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