NCPA - National Center for Policy Analysis

Taxing Online Sales

February 18, 2003

No discussion of Internet taxation gets very far without someone using the phrase, "a level playing field." Sure enough, the recent decision by retail behemoths Wal-Mart, Target and Toys 'R Us to start collecting sales taxes for online purchases is being touted by tax proponents as a move toward parity. It's anything but, say observers.

Governors talk a lot about what they're "losing" in online sales tax revenue, but that's not where the money is (yet, anyway), and they know it.

  • Internet sales approached $80 billion last year, which is a twofold increase over 2001, but still amounts to only about 3 percent of all retail sales.
  • The states stand to gain much more from catalog sales, which they've been eager to tax for decades.

Deferring to the Supreme Court Quill decision, federal law forbids a merchant in one state to collect taxes on another's behalf. The burden on the remote seller is too high, said the Court. And besides, why should a retailer in Orlando collect and remit sales taxes to support the police department and public schools in Denver?

But governors want the law changed. This would open opportunities for states to tax other remote economic activity.

  • Online retailers and catalog companies fear that states won't stop at a sales tax remittance requirement.
  • Other "business activity" fees -- a corporate income tax, a franchise tax, a business licensing tax, a gross receipts tax, etc. -- could follow in every state where an online business has customers.

It's telling, say observers, that the governors refuse to rule this out.

Source: Editorial, "The Internet Tax Trap," Wall Street Journal, February 18, 2003.

For text (WSJ subscription required),,SB1045537416350503823,00.html


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