E-Commerce Shows Need to Revamp the Tax System

by


This first appeared in the
North Hills News Record

Death and taxes are the only two certainties in life. The Internet seems to be the one exception--at least it has been but there's too much money at stake for any self-respecting politician to leave it that way.

Last fall, Congress wisely imposed a moratorium on Internet sales taxes until October 2001. For now, state and local governments aren't affected too much.

Despite all the hype, consumer Internet sales represent less than 1 percent of the $3 trillion retail industry. The bulk of e-commerce occurs business-to-business but even those sales amounted to only $43 billion last year.

Just as the Internet is the biggest factor in our changing economy, the debate about taxing e-commerce is just a part of a broader debate of tax reform. Changing our overall tax system can solve e-commerce questions.

If the explosive growth of e-commerce continues and remains tax-free, mayors and governors are insisting the public will have to endure all kinds of horrid scenarios like police lay-offs, closed schools, etc. because of depleted public coffers.

Just to show you how serious our elected officials are about this issue, consider the saga of the Advisory Commission on Electronic Commerce--the group Congress created last October to advise it on Internet tax policy. Congress decided the ACEC would have eight members from the Net industry and eight from states and local municipalities.

When it was announced in December that Congress had named nine business members and seven from government, the U.S. Conference of Mayors and the National Governors Association got so mad they filed a lawsuit to block the Commission from meeting.

To make peace, Congress bumped former Netscape Chairman James Barksdale from the ACEC and appointed a county commissioner from Oregon.

Last week, the board met for the first time. Those members representing e-commerce say imposing sales taxes on the Internet could stifle growth in an industry that is helping to drive the U.S. economy. New taxes also could drive Internet firms overseas. They're right.

On the other side of the issue, are brick and mortar retail merchants who collect sales taxes and the governments that rely on those sales taxes. Certainly, public funds can be adversely affected.

But let's be realistic. Figuring sales taxes on e-commerce would be a nightmare.

For example, my computer is in my home office in Butler County where the sales tax is 6 percent. My Internet provider is located in Allegheny County which has a 7 percent sales tax. The server that houses all of my Internet related files is in Pasadena, California. Los Angeles County has an 8.25 percent sales tax. So if I was involved in e-commerce, what sales tax rate should be used?

But the nightmare doesn't end with tax rates. What's taxed varies from state to state too. In Pennsylvania, most food and clothing are exempt from sales taxes. California taxes just about everything.

The Supreme Court has ruled that one state cannot force another state to collect sales taxes for businesses located within its borders. Although most states technically require consumers to figure and pay sales taxes on purchases from out of state, they seldom do and the laws are rarely enforced.

To settle the issue, any tax on e-commerce should follow these two principles:

	it should be no different from those on other forms of commerce and
	it should be as simple as possible to reduce the cost of compliance.

Eliminating all income taxes and imposing sales taxes would accomplish both. That idea may make many people uncomfortable but the Internet is redefining the economy. It's time to redefine tax collection.

© Copyright Deborah A. Ayers 1999. All rights reserved.