Copyright 2000 The Washington Post
The Washington
Post
February 20, 2000, Sunday, Final Edition
SECTION: OUTLOOK; Pg. B01
LENGTH: 2114 words
HEADLINE:
Is This The Death of Sales Taxes?
BODY:
What do malls and sales taxes have in common? The
Internet could kill both.
Or not. But the growth of
online shopping--and its defiance of geographic boundaries--could utterly
transform how we think about commerce and taxation. If the cash register is
located in cyberspace (but the customer is not), who does the collecting?
The existing rules are being applied to the new shopping order, but
they're confusing, cumbersome and the product of a different time. Buy
online--or from a catalog--and you're rarely charged sales tax. (Legally, you're
still responsible for sending those tax dollars to your state or city, unless
local laws let you off the hook. Who knew?)
A debate about whether to
change all that rages on. In 1998, Congress enacted a three-year moratorium on
new taxes for Internet purchases and appointed a national advisory committee to
suggest a permanent solution. That panel, led by Virginia Gov. James Gilmore, is
aiming at an April recommendation.
Outlook invited six experts--on the
Internet and on taxation--to discuss these issues at our electronic round table,
otherwise known as e-mail. Excerpts:
JOEL SLEMROD, Paul W.
McCracken professor of business economics and director of the Office of Tax
Policy Research at the University of Michigan Business School:
Think of
Internet commerce as the ethanol of the new economy. Like ethanol, it creates
jobs. It's the fuel of the future. But most economists agree that there is no
compelling economic justification for the ethanol subsidy. The same goes for
Internet commerce: If it is the wave of the future, it will survive--and indeed
flourish--without any special exemption from state and local retail sales taxes.
There's no reason for the tax system to induce people to ignore local ma and pa
stores, which create millions of jobs.
Putting Internet commerce on a
level playing field would be trickier than eliminating the ethanol subsidy,
because there are 7,000 or so taxing jurisdictions in the United States. But
that is a practical, solvable problem.
Together with the globalization
of commerce, the Internet exacerbates tensions in our cobbled-together system of
taxing commerce. But the threat is not only to sales taxes. Most income tax
systems rely on the concept of location--where income is earned and where
companies are located.
When computer servers can be put in a tax haven
like the Cayman Islands, the U.S. federal income tax base is at risk. When
companies can put their servers in low-tax jurisdictions, then state income
taxes and local property taxes are also at risk. If anything, sales taxes that
are levied based on where consumers live rely on a less slippery concept than do
income taxes based on where income is produced.
STEPHEN MOORE, fiscal
policy director at the Cato Institute:
Joel Slemrod has the story all
wrong. The Internet is not the ethanol of the new economy. It is the jet fuel.
It is propelling America into an era of rapid--really unprecedented--growth. It
is creating widespread prosperity. We must nurture this infant industry--leave
it unfettered from meddling government regulators and taxers. If we do, the
potential growth of our "e-conomy" is almost limitless.
The government
should also keep its paws off because in a world of e-commerce transactions, the
need for government is vastly diminished. When two parties transact in
cyberspace, they do so in total privacy, independent of government. Unlike a
transaction at a retail store, where I pay sales tax as a quasi-user fee for the
related government services I receive, the e-commerce transaction does not
require police protection, fire service, garbage collection and so on. If I have
to pay for government services I don't get, where's the tax fairness in that?
The Internet has been the greatest cash bonanza for state and local
governments of any invention in history. States and localities have doubled tax
collections in 10 years. The governors and state legislators should be
worshiping at the shrine of the Internet, not seeking to tax it.
ELLEN
ULLMAN, a consultant to start-up companies and author of "Close to the Machine:
Technophilia and Its Discontents":
It's hard to defend the sales tax per
se--it is, after all, a regressive tax, and it may be time to investigate other
ways for municipalities to raise revenues. But I don't think it's the nature of
the tax that bothers people who are arguing against taxing
Internet sales. I believe their objection is to any
tax. The motive behind the anti-Internet tax
movement is libertarian and anti-government: They want to shrink government by
denying it sources of revenue. Their hope is to take this new and enormously
growing sector and declare it a tax-free zone perpetually, and then have it
serve as a model for repealing taxes in older commercial sectors.
Employees of Net businesses turn on the lights, drink water, walk on the
sidewalks, ride on the roads and take buses as much as any other workers. Their
supposedly ethereal nature is a myth: Net companies rely on local municipal
services. Why shouldn't they pay for them like everyone else?
A Net
business is no different from a mail-order company. In mail order, the
"cumbersome" difficulties of tax administration under the current regime have
turned out to be rather simple to solve. Computers are very good at looking up
rates in tables and calculating things like percentages. A ridiculously
straightforward program could perform all the necessary administrative tasks of
an Internet tax. The issue is political will, not technical difficulty.
CHARLES E. McLURE JR., a senior fellow at the Hoover Institution at
Stanford University and deputy assistant secretary of the Treasury for tax
analysis from 1983 to 1985:
If we were starting from scratch, knowing
what we know now, it would probably be better to use the individual income tax,
rather than the sales tax, to finance local government and perhaps state
government. But we are not starting from scratch, and scrapping the sales tax in
favor of income taxation would cause wrenching adjustments. So I think we should
concentrate on trying to fix the sales tax.
The typical state sales tax
has four serious faults. It applies to many purchases made by businesses; it
does not apply uniformly to tangible products and to intangible products and
services; it is incredibly complicated; and, as a result, the Supreme Court has
ruled that a remote vendor cannot be required to collect tax in a state unless
it has a physical presence there.
The solution is obvious, if
politically difficult: Eliminate tax on all sales to business (such sales
account for an estimated 40 percent of sales tax revenues on average); tax
essentially all sales to households (or have the same exemptions in all states),
simplify the system, and require collection of tax on sales by remote vendors.
Arguments for exempting electronic commerce are not convincing. The
"infant industry" arguments for artificially encouraging the growth of
electronic commerce are something only a central planner could love. As Ronald
Reagan said in 1981, "The taxing power of government must be used to provide
revenues for legitimate government purposes . . . not to regulate the economy or
bring about social change."
RICHARD AULT, an associate professor of
economics at Auburn University:
About 30 years ago, UPS broke the postal
monopoly on package delivery. Catalog sales boomed. Now it appears that Internet
sales will be like catalog sales on steroids. This will be great for consumers
(particularly in remote areas and in high-tax states) and great for ambitious
merchants looking to expand their market. It will not be great for local
tax collectors. Will the Internet bring an end
to the sales tax? I am certain of this: It will greatly reduce
sales taxes' importance as a source of revenue.
EDWARD
MALLEN, the CEO of NetCentric in Bedford, Mass., an Internet fax provider to
ISPs:
The Internet is a major force behind the continued U.S. economic
expansion. The beauty of this expansion is that it is being driven by the rise
of new companies that rapidly increase employment and create new markets for
goods and services.
There is no doubt that the tax issues are enormously
complex. One could argue that all of the tax jurisdictions could cooperate
across the country, but it would never happen at the required
"Internet speed." An Internet sales tax would
create tax avoidance and force the e-commerce companies to move
to non-taxing states and, ultimately, offshore.
The real bonanza for
both federal and state government is the income tax on the employees and
companies that make up the Internet. The states should focus on incentives to
bring such employees and companies into their tax base and to keep them there.
ELLEN ULLMAN:
Is Edward Mallen really sure that the Internet is
"a major force behind the continued U.S. economic expansion"? I would like to
see some numbers. I suspect that low interest rates are the real engine of
growth right now, and, in terms of revenues, the Internet must pale beside the
effect of all those SUVs being sold, all those new office buildings going up and
the boom in housing construction.
Like Charles McLure, I don't believe
the Internet should be protected. The purpose of local taxation is to pay for
local services, not engineer the growth of one sector over another. (How nice
that we can quote Ronald Reagan to that effect.) The allure of e-commerce is
wide choice and convenience; if Net business can't attract customers on those
bases, why would we want to foster their growth?
Stephen Moore's
positions simply support my assertion that the driving motive behind the
anti-Net-tax argument is an overall mistrust of government. To call the revenues
that support local services a cash cow is to denigrate the role of
infrastructure as the basis of all economic activity. I have lived in countries
with strained or nonexistent municipal services, and I doubt Mr. Moore would
start a business in any of them. It's no accident that today's start-up
companies are congregated in cities and towns with good local services--freeways
to zip around on, airports to fly in and out of, and so on.
EDWARD
MALLEN:
In 1995, $ 6 billion in venture money was invested in the United
States, and last year the amount was $ 35 billion, according to an article in
Friday's Boston Globe. The number is expected to rise dramatically in 2000.
Where is the money being invested? Ninety percent is being invested in
technology-related companies (most of them Internet-related or desperately
trying to be). There is no need to place speed bumps on the road to growth that
an Internet tax represents. In fact, we ought to think about rolling back all
sales taxes to stimulate non-technology sectors of the economy. Sales tax is a
double taxation directed at the consumer on earned income that is already taxed.
JOEL SLEMROD:
I agree that the Internet has helped fuel the
current boom. It is such a wonder that it doesn't need special
tax breaks. If the real secret of the
Internet's success is that it facilitates sales
tax avoidance, then don't bet your 401(k) plan on the new economy. It
will do just fine, thank you, paying the same taxes as other businesses. After
all, any business could use the extra flow of capital from not paying the taxes
that its competitors pay.
Stephen Moore's not-so-hidden agenda is to
radically downsize federal, state and local governments by starving them of
revenue, and he's on to a sure-fire way to do it--identify booming sectors of
the economy, and relieve them of any tax burden.
RICHARD AULT:
There is no reason to exempt Internet
sales from taxation. I do think, however, that someone had better give
careful thought to problems associated with differential taxes
on Internet sales across the states. States will be forced by
competition with other states to lower rates on Internet sales.
I would guess that in the absence of a uniform federal sales
tax, the revenues obtainable from taxing such sales will prove to be
minimal.
CHARLES McLURE:
The tax debate is characterized by
fuzzy thinking and invalid arguments. One is that remote vendors should not be
required to collect use tax because they do not consume services provided by
state and local governments where they lack a physical presence. But it is not
the consumption of public services by the vendor that justifies the collection
of tax; it is the consumption of services by the local customer. There is no
reason that tax should not apply to a household's purchases, just because they
are made from a remote vendor.
GRAPHIC: Illustration, peter
hoey for The Washington Post
LOAD-DATE: February 20,
2000 
