Taxation and the Internet - Arguments For And Against E-commerce Taxation

ARGUMENTS FOR AND AGAINST E-COMMERCE TAXATION

Supporters of e-taxation argue that state and local governments, which rely on sales-tax revenues for one-third to one-half of their operating funds, will face serious income shortfalls if e-commerce remains untaxed. Sales-tax revenues pay for essential services such as schools, fire and police departments, public libraries, and health care. If budget needs can't be met, states will either shift the tax burden to other sources, such as telecommunications, energy, income, or property taxes, or simply cut services. And as online retailers drive traditional merchants out of business, property values and property taxes would decline, leading to greater revenue losses. Tax advocates also state that keeping e-commerce tax-free unfairly disadvantages traditional vendors who must pay sales taxes, while online retailers enjoy a competitive pricing edge.

In response to complaints that the thousands of separate U.S. tax jurisdictions create a taxation universe too complex for e-vendors to cope with, tax supporters counter that software could be developed that automatically identifies the applicable e-sales taxes for all taxable goods or services in each ZIP code. Tax proponents also claim that the Constitution guarantees states the right to collect tax revenues; thus legislation such as ITFA infringes on state sovereignty.

Finally, taxation proponents argue that tax-free e-commerce benefits the wealthy. Studies identify a growing gap in the percentage of higher-income versus lower-income households that utilize the Internet (the "digital divide"). Since lower-income groups have less access to the Internet, they cannot avoid sales taxes by purchasing online.

In comparison, e-tax opponents claim that taxing e-commerce would smother its expansion and impede online innovations. This argument formed the main impetus behind the ITFA. Opponents also point out that the U.S. contains roughly 7,000 state and local sales-tax rates in 45 states and Washington, D.C. In addition, taxable items are classified differently in different jurisdictions. It would cost far too much for e-retailers to calculate, collect, and remit sales taxes under such conditions. Opponents also question why e-vendors located in one jurisdiction should subsidize goods and services located in another.

Anti-tax arguments propose that Internet taxes imperil America's international competitiveness, since domestic e-businesses would relocate to evade them. And e-sales taxes would hamper overall U.S. economic growth, since e-commerce was one of the mainsprings of the 1990s boom. Finally, they point out that sales tax revenues lost to e-commerce have been so small as to have little effect on state revenues.