Expanded commerce over the Internet has prompted a debate
as to how governments should tax electronic transactions.
- While Internet commerce is growing rapidly, it is still
a relatively new phenomena that has not yet realized its
full potential.
- The imposition of new, discriminatory taxes at this
early stage would discourage companies from conducting
business over the web and threaten the future of the electronic
marketplace.
- Legislation known as the Internet Tax Freedom Act would
place a moratorium on new net taxes but allow local jurisdictions
to continue to assessing taxes that already exist.
The private sector must work cooperatively with government
to craft a balanced strategy for Internet taxation that:
- allows for the continued expansion of Internet commerce;
and
- addresses the revenue requirements of local governments.
"Imposing new, discriminatory taxes on the Internet
and electronic commerce is a shortsighted policy goal that
will choke this rapidly expanding medium for global trade,
investment, and communication-the negative implications
of which are far greater than foregone tax revenue."
Larry Carter
Chief Financial Officer
Issue:
The Internet taxation debate encompasses two main issues:
1.Governments' Concerns About Tax Revenue vs.
Internet Growth .
Some state, local, national and international leaders
want to collect taxes on e-commerce sales to increase
or protect government revenue streams. Many other
leaders insist that taxation of online sales threaten the
growth and global expansion of e-commerce and the
Internet.
2.Main Street Merchants' Fear of Online Competition .
So called "Main Street" merchants (with brick
and mortar
storefronts) complain that freedom from sales taxes gives
Internet businesses an unfair price advantage. E-commerce
vendors counter that Internet businesses are governed by
the
very same rules applied to mail order sales, that sales
taxes
cover the cost of local services such as fire, sewer and
water
that virtual storefronts do not use, and that virtual storefronts
still must pay for shipping, costs not born by Main Street
merchants.
Impact:
Imposing new, discriminatory or special taxes on e-commerce
at such an early stage in its development could:
- discourage companies and consumers
from using the
web for business
- threaten future expansion of the electronic
marketplace
- invite regional and international barriers
to global trade
(virtual protectionism).
At the same time, projections for explosive e-commerce
growth indicate a potential for future sales tax revenue
implications that should be watched. (So far all, however,
all
evidence suggests Internet-inspired productivity gains
increase government revenues far more than lost sales taxes
reduce them).
Position:
There is no need to impose new taxes on the Internet or
electronic commerce at this time - Congress should extend
the Internet tax moratorium for another 5 years. Federal,
state
and local governments are currently running revenue
surpluses, suggesting uncollected e-commerce taxation is
not
yet hurting their bottom lines. Indeed the uncollected tax
from
Internet sales ($170 million in 1998) represented just 0.1%
of
the total sales and use taxes collected by state and local
governments in 1998.
Requiring e-commerce companies to comply with the
often-confusing tax rules of 7,500 separate jurisdictions
could
severely impede development of this rapidly expanding
medium for global trade, investment, and communication.
State
and local governments should use an extended moratorium
period to simplify their existing, complex tax structures.
Industry and government must work together to encourage
the
growth of the Internet, and avoid reflexive application
of Old
World regulations on the new economy.
Background:
While the Internet is boosting business revenues, generating
millions of new jobs, and enabling extraordinary gains in
productivity, many still fear its economic impact. Specifically:
- state and local tax collectors worry
online commerce by
out-of-state merchants may erode their tax base .
- "brick-and-mortar" retailers
fear competition from
Internet businesses will hurt their bottom lines.
The debate over tax collection on remote sales is nothing
new.
Indeed, for years the same concerns have been raised over
mail order and catalogue sales. So far these fears are
unjustified:
- a recent report found that Internet
sales do not diminish
state and local revenue in any significant way .
- data suggest that e-commerce will prove
an ally to
"main street" businesses, with many storefront
companies increasing market share thanks to the
Internet.
Taxing Internet commerce raises particularly difficult
questions:
- Should there be no tax at all, one
global tax, one-tax per
nation, different taxes levied by each state within a
nation, or even varying taxes levied by more than 7,500
localities?
- Should consumers be taxed based upon
where they live,
where the seller is headquartered, or where the
purchased goods are being shipped?
Big Five accounting firm Ernst & Young examined just
such
thorny issues and concluded Internet sales and use taxes
would be unusually complex and expensive to administer .
While collecting $1 in taxes costs traditional retailers
7
cents, it could cost Internet retailers as much as 87
cents. ( Ernst & Young ).
Tax systems are confusing: In New York, large
marshmallows are considered taxable snacks, while
little marshmallows are tax-exempt food. Plain
doughnuts are tax-exempt in some states while
jelly-filled ones are taxable. Clothes are taxable in most
states, but in 9 they are not (except for handkerchiefs
which are taxable in 4 of those 9). ( Business Week ,
p. EB 32, Feb. 7, 2000).
Furthermore, rapid growth in Internet sales has not yet
eroded
government revenue. To the contrary, economic growth and
productivity gains enabled by the Internet revolution have
increased state tax revenues.
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- The
Internet Tax Fairness Coalition (ITFC) is an alliance
of business, consumer, retail, technology and communications
companies and industry groups that promote clear and simple
tax rules for the borderless marketplace. Presently, interstate
commerce and the economy are burdened by multiple, confusing
and inconsistent state tax rules. Therefore, development
of a simple and uniform system is critical.
The ITFC supports the following objectives for reducing
the tax burdens imposed on interstate commerce that thwart
the development of a borderless marketplace:
· Establish simple and uniform sales and use tax
rules that reduce compliance burdens for all taxpayers.
· Enact nexus standards for business activity taxes
that eliminate uncertainty and the potential for double
taxation.
· Promote availability of the Internet to all by
prohibiting taxes on access fees.
· Prevent multiple and discriminatory taxation
by extending the application of traditional tax rules
to electronic commerce.
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