Battle brewing over sales tax on Internet purchases

ORIGINALLY WRITTEN K-STATE EXTENSION
Americans are buying everything from cars to groceries with the stroke of a computer key but this dramatic change in the way people do business poses several big questions:

Are on-line sales hurting the local retailers?

Should those transactions be taxed? If so, how?

At least one study has shown that there?s no evidence of strong competition between Internet commerce, also called e-commerce, and retail stores, said Kansas State University economist Tom Garrett.

Those opposed to taxing the Internet argue that taxes will curb sales growth on this fledgling venue, said Garrett, a public finance specialist. They cite the benefits of the Internet: its convenience and that it brings goods to consumers in some areas that lack stores offering comparable products.

Taxes on such transactions might inhibit growth for those companies that are performing a valuable service, they say.

The Internet Tax Freedom Act (ITFA) imposed in 1998 placed a three-year moratorium on imposing new taxes on the Internet. The moratorium will be lifted in October 2001.

?This does not prevent states from applying existing sales-taxes and use-taxes to the Internet,? Garrett said. ?It only applies to new taxes. This is an important point that is often missed in debates over Internet taxation.

?Sales taxes are not new taxes, so state and local governments could levy those taxes,? Garrett said. ?There is a problem with this, however. With the Internet, the physical presence, termed ?nexus,? required under sales taxation is gone. For example, what if a Kansan is sitting on the beach in Florida and orders a book from a New Jersey company on his laptop. Which state should get the sales tax revenue? If it is Kansas, how will the state collect the revenues??

Under the Interstate Commerce Clause of the Constitution, states may not collect sales tax revenues from sellers outside the state? which is exactly what happens over the Internet?even if tax collection was possible.

?The same problem exists with mail order. For instance, Kansas cannot require a New York business to collect Kansas sales tax from a Kansan buying a product from New York,? he said.

Local communities can petition Congress to lift the ban taxing the Internet under the ITFA, he said. But the problem communities face isn?t necessarily taxation, rather it is the Interstate Commerce Clause.

?The technology will eventually allow for simple, accurate sales tax collection on the Internet. One of the biggest long-run problems faced by state and local governments is the Interstate Commerce Clause,? Garrett said.

As of May 1999, nearly 62 million Americans were using the Internet, said Garrett. Of those 62 million, almost half have shopped on-line.

On-line sales in 1998 reached nearly $10 billion and by all accounts, sales have surged since.

And state and local governments don?t want to miss out on the potential source of funding for schools, roads and public safety, Garrett said.

The National Governors Association (NGA) has estimated that by 2002, e-commerce will grow to $300 billion and result in a $20 billion (about 12 percent) tax revenue loss to states.

But there are problems with those estimates, Garrett said.

They ignore business-to-business transactions, which are tax exempt. And they ignore trade creation?new products available on-line that are not available in stores, or products that are not available locally. Such trade cannot be considered tax revenue losses or losses to retailers.

?Also, computer goods are the No. 1 on-line purchases,? Garrett said. ?A significant portion of all computers are bought via mail-order. There is no tax loss if consumers substitute mail-order purchases with Internet purchases.?

Garrett said if one takes into account the factors that the NGA estimates ignore, a loss of $3.5 billion (under 2 percent) is a more likely estimate of the tax revenue lost to states by 2002.

The issue has surfaced recently in Kansas communities. The Wichita City Council recently passed a resolution asking Congress not to extend the ban on local sales on Internet commerce and the Manhattan City Commission has taken a similar stand.

A study released Jan. 4 by the Internet Consumers Organization, a non-profit public policy group, recommends that Internet sales be taxed no differently than mail and telephone sales orders.

There are more than 6,400 state and local sales tax rates in the United States. Collecting and computing taxes for each jurisdiction would be difficult and costly, Garrett said.

He noted, however, that software now under development is capable of creating databases of tax rates and can compute the necessary tax based on the address of the buyer.

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