NCPA - National Center for Policy Analysis

California Tries To Tax Internet Sales

June 14, 2000

The California State Assembly has approved legislation to tax Internet sales. If successful, the California effort undoubtedly will be copied in most other states.

It is important to note that e-commerce is merely an extension of mail order and catalogue sales that have been around for decades. Sales over the Internet are not treated any differently for tax purposes. The so-called Internet tax moratorium passed by Congress does not in any way inhibit states from taxing Internet sales the same way traditional sales are taxed. It only prevents states from imposing discriminatory taxes on Internet sales.

States historically have had great difficulty taxing mail order sales. The same is true of the Internet. Several Supreme Court cases have made it very hard for states to compel out of state sellers to withhold sales taxes. Generally, unless a business has a physical presence in a state, called nexus, it is not required to withhold use taxes.

Amid all the hype about Internet sales, unfair competition for traditional businesses and lost tax revenue, it is important to keep some facts in mind:

  • Internet commerce will not grow exponentially, and according to the Commerce Department, amounts to a little over one-half of one percent of retail sales.
  • An spokesman thinks 15 percent of sales is the most the Internet will ever command.
  • Estimates of future growth of Internet consumer sales are crashing downward, as investors realize there is a limit to what people will buy on-line.
  • Even when consumers can avoid sales taxes, they often find shipping costs eat up the saving.

State and local government officials hyperventilating about lost tax revenue should calm down. They should at least wait for the shake-out among the dot-coms to settle before rushing to pass potentially unconstitutional laws to deal with nonexistent problems.


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