Commissioner Orson Swindle Federal
Trade Commission Address to the Browning Symposium University
of Montana "Taxation of E-Commerce"
October 15, 1999
It is a pleasure to be with you
this morning. As is always the case for Federal Trade Commissioners,
it is important for me to note that my comments today are my own and
in no way represent the views of the Commission or of any other
Commissioner.
Before addressing the topic of
Taxation In Cyberspace, it might be helpful to share with you some
personal thoughts gained from my years of experience as a federal
official. First and foremost, our Founding Fathers had it right:
government should play only a minimal role in our lives. I believe
it was Will Rogers who once observed: "All government programs have
three things in common: a beginning, a middle, and no
end."
I mention this because the
promises of electronic commerce have those in government excited:
the politicians see something to tax and more money to spend, and
the regulators see something with endless possibilities to regulate.
In their emotion, I fear they will forget some basic rules of a
society built upon private enterprise.
Given the tremendous benefits
that typically flow from private markets, government intervention in
these markets should be undertaken only when it is clearly
necessary. We in government, responsible for regulation and for
economic and tax policy, should be ever mindful of the Hippocratic
Oath -- "First, do no harm." Before embarking on any type of
government activity, asking ourselves, "Does this make sense?" might
serve us all well.
Taxation is a form of
regulation. The history of taxation seems to be that every time a
new product, a new industry, a new form of social organization, or
even a new economic concept of income or wealth has arisen,
governments have moved to tax it. As President Reagan said, "The
government's view of the economy could be summed up in a few short
phrases: If it moves, tax it. If it keeps moving, regulate it. And
if it stops moving, subsidize it."
The Internet Economy
Earlier this year, the
University of Texas, backed by Cisco Systems, introduced a study of
the current status of electronic commerce -- one of the very first
attempts to measure the Internet economy. According to the UT/Cisco
study, the Internet economy generated an estimated $301 billion in
revenue in 1998 and was responsible for over 1.2 million jobs.
(These estimates are based on worldwide sales of Internet-related
products and services by U.S.- based companies.)
The study divided the Internet
economy into four layers: the infrastructure layer that includes
companies like MCI Worldcom, AOL, and Cisco; the applications layer
that includes companies like Netscape, Microsoft, and Sun; the
intermediary layer that includes companies like Schwab.com, Yahoo,
and TravelWeb.com; and the commerce layer that includes companies
like Amazon.com, IBM, and WSJ.com. It is important to note that many
companies are players at multiple layers. Each layer produced a
range of revenues from $56 billion to $115 billion and created from
230,000 to 482,000 jobs in 1998.
Let me put those figures in
perspective. The Internet economy already is bigger than the energy
industry ($230 billion) or the telecommunications industry ($270
billion) and is almost as big as the automobile industry ($350
billion). The Internet economy is becoming as essential to American
life as the automobile.
As impressive as this is,
realize that the Internet is still in its infancy. Recall that the
browser programs, such as Netscape, which make the Internet so
consumer-friendly did not arrive on the scene until 1993.
The Question To
Consider
As you may know, I spoke before
the inaugural meeting of the Advisory Commission on Electronic
Commerce this past summer. The question I posed that day is worth
repeating today. "Should policymakers apply a Depression-era tax
system to the economy of the 21st Century"? The answer to that
question will have an enormous impact on economic growth -- the
creation of wealth, jobs and prosperity -- throughout our country
and the world. The question of imposing new taxes on the Internet is
more than just an ideological debate. The economic consequences of
government actions in e-commerce will be profound and serious. Any
missteps will injure our country gravely, and diminish our position
as the leading world economy.
The Internet is a competitive
advantage for the United States: more than one-third of all current
Internet usage is by Americans. The Internet advances the causes of
free trade and improvement of living standards by creating a
comparative advantage for people and firms that produce competitive,
high-quality services and goods. Internet-specific taxes and taxes
on Internet access threaten to choke the Internet at a critical
early stage of its development. Unwarranted taxes and regulation at
a time when the technology is still rapidly evolving threaten to
lock in or limit the Internet to specific technologies and modes of
service that fall far short of its likely potential. Tomorrow's tax
policy will have an enormous impact in shaping the future of this
burgeoning new industry of electronic commerce supported by the
Internet.
The Complications of Taxing
Internet Commerce
The issue of taxing the
Internet is complicated by several factors:
a. With approximately 30,000
taxing jurisdictions, compliance becomes a significant obstacle. The
Internet is inherently susceptible to multiple and discriminatory
taxation in a way that commerce conducted in more traditional ways
is not. Double taxation would be inevitable because the borderless
nature of the Internet makes taxation very tricky. If we simply
required that merchants collect the relevant tax for the
jurisdiction into which the product is being delivered, such
legislation would produce a world that is anything but "simple." Can
you imagine the confusion that would arise in the case where a small
business owner from New Hampshire (a state without sales tax) is
required to collect the tax on a purchase made by a consumer living
in the Dallas area-- a metropolitan area with numerous suburbs,
several of which have different local sales tax rates, in addition
to Texas' state tax? Or even more bizarre, consider Internet sales
of shoes-- a product that is tax exempt in some states but not
others, depending on such factors as whether the footwear in
question is tennis shoes, "sneakers," or cleated athletic
shoes.
b. Since Internet commerce is
so new, we do not know what the basic business model will look like
in a few years. How can we know how to tax it? There are likely many
adverse unintended and unanticipated consequences lurking in the
future.
c. How would the taxes be
collected? One of the main benefits of Web-based businesses is that
the ability to reach such a large potential universe of customers
cheaply provides an opportunity for small one- and two-person
companies to thrive without a tremendous amount of start-up capital.
The cost of compliance and tax collection alone for these small
businesses could be enough of a deterrent to keep them from
participating in the marketplace.
Clearly, compelling retailers
to collect tax under the current jurisdictional regime would place a
significant burden on merchants; and such a burden would likely not
be uniformly felt across all retailers. If a recent study by the
Washington State Department of Revenue is any indication of things
to come, small businesses would be hit hardest with respect to the
costs of compliance with multi-jurisdiction tax rates. More
specifically, a recent study by one of the Big 5 accounting firms,
Ernst and Young, has estimated the costs of compliance of small
businesses to be close to 87 percent of the sales tax they
collect--a far greater percentage than the 14 percent of the tax
collected that it would cost large businesses to comply.
While these costs might be
eased by employing various software packages, such software can cost
well over $ 20,000. In a time where technology finally makes it
possible for virtually anyone to realize the American Dream by
starting out on his or her own and creating a business from scratch,
do we really want to place one more barrier to entry in the form of
heavy compliance costs in front of these potential entrepreneurs
that might otherwise fuel our economy?
d. Another major enforcement
issue is identifying the state, country or countries that have tax
jurisdiction over income generated by electronic transactions.
Electronic commerce permits a foreign person to engage in multiple
business transactions with customers in the United States without
ever having entered the country.
Furthermore, do we want to
enact a taxation scheme that, to be effectively implemented,
systematically undermines our privacy by amassing a comprehensive
database on our online purchases so that some government agency can
be certain that we paid our relevant taxes? What guarantees do we,
as consumers, have that such an agency, upon learning of our buying
habits, will not either sell that valuable information to third
parties or use it in a way that undermines our personal
security?
The Lost Revenue
Argument
Throughout this debate, the
argument has often focused on the claim that failing to create a
suitable Internet commerce tax will lead to the steady decline of
state revenues, perhaps as much as $20 billion a year, significantly
hindering the development of state infrastructure. While such
arguments conjure up a frightening vision of what could occur, are
such predictions accurate? Another recent study by Ernst and Young
has shown that less than $170 million of sales and use tax were not
collected in 1998 on Internet sales -- only 1/10 of one percent of
total state and local tax revenues. This small effect is due to a
number of factors, two of which should be noted. First, an estimated
80 percent of current e-commerce is business-to-business sales that
are not subject to sales and use taxes. Second, an estimated 63
percent of current e-commerce business-to-consumer sales are
services such as travel and financial services that are not subject
to state and local sales and use taxes. These estimates are similar
to another study by scholars at the University of Chicago and
Harvard who have estimated the loss to be close to 1/4 of one
percent. Considering the future growth of electronic commerce, these
scholars have predicted that even after five years, the average loss
in sales tax revenue to states will amount to only two percent of
potential tax revenues--a mere fraction of the $20 billion loss that
has been predicted by the proponents of Internet taxation. Is
retaining this minor loss in tax revenue worth crippling potential
entrepreneurs as they strive to find a place for themselves in this
dynamic new marketplace?
Those advocating taxation of
the electronic marketplace are also operating on the basis of
expectations: they are hungrily anticipating revenue to spend as a
result of taxes collected on new products or services. What they may
lose sight of, however, is that inappropriate government intrusion
in the form of regulation and taxation may in fact chill the
development and marketing of new products and services.
Recommendation
Let me offer a proposal, that I
favor, for your consideration. Senator John McCain has introduced
legislation to permanently ban Internet sales taxes by specifically
outlawing any future attempts to impose a sales tax structure on
Internet sales. In addition, Senator McCain's bill calls for WTO
adoption of a global moratorium on Internet taxes. As Senator McCain
said on the Senate floor, "This bill would make permanent the
moratorium on sales and use taxes for e-commerce, and would
encourage the Administration to urge our world trading partners to
do the same."
I could not agree more with
Senator McCain. While the Advisory Commission on Electronic Commerce
seems more focused on how to tax the Internet, only Congress can
authorize one state to compel sellers in another state to collect
Internet taxes. It is important to move forward to ensure that the
default position is not to lift the moratorium on Internet taxation,
but to place the burden of proof on those advocating taxation of
e-commerce.
Thank you.
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