NCPA - National Center for Policy Analysis

Is The Taxman Coming To The Internet?

May 6, 1999

Concerned that electronic retailing will cut into sales tax revenues, many state officials want to slap a tax on sales over the Internet. Anti-tax opponents say buying online is like consumers crossing state borders (or the U.S.-Canadian border, for example) to take advantage of lower, more competitive tax rates.

  • On average, sales tax revenues account for 32 percent of states' revenues.
  • Forrester Research Inc. estimates that by 2003 online retail sales will hit $108 billion -- roughly 6 percent of total retail sales.
  • University of Chicago economist Austan Goolsbee estimates that applying current state sales taxes to Internet sales would cut the number of buyers by 25 percent -- and total Internet spending would drop by nearly a third.
  • Applying state taxes would cut projected 2003 sales from $108 billion to $76 billion.

Goolsbee found that individuals living in high-tax jurisdictions are more likely to purchase goods online than those living in more moderate sales tax regions.

Critics of the tax-the-Internet movement contend states should vie for residents and taxpayers by competing with one another to lower taxes -- and initiate efficiencies in their governments which would make that feasible.

Source: Michael W. Lynch (Reason magazine), "Run for the Border," Investor's Business Daily, May 6, 1999.


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