NCPA - National Center for Policy Analysis

Internet Tax is Misguided

November 20, 2003

On November 1, 2003, the Internet Tax Freedom Act of 1997 lapsed. Contrary to reports issued by the media and by members of Congress, the moratorium does not directly affect the ability of states and localities to impose sales taxes on purchases made over the Internet, says a Cato Institute study.

Those who support broadening the ability of states to collect sales taxes on remote retailers suggest that the inability of state governments to collect taxes on e-commerce has deprived states of billions of dollars in needed revenue and that essential government services will be imperiled. However, the study finds:

  • In 1999, e-commerce sales totaled $5.5 billion; by 2002, sales had grown to $14.3 billion.
  • Of the $3.6 trillion dollars in aggregate retail sales in 2002, Internet sales accounted for only 1.3 percent.
  • For the three year period during which the Department of Commerce has been collecting data, e-commerce has averaged just 1.1 percent of total retail sales.

It would be wrong, for states and local officials to pin the blame for their sales tax woes on the Internet, which has only recently begun posing any sort of threat to the sales tax system, and only a marginal one at that, says Cato.

Source: Adam Thierer and Veronique de Rugy, "The Internet Tax Solution: Tax Competition, Not Tax Collusion," Cato Institute, October 23, 2003.

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