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Opinions/Editorial Taxing the Internet Released by William F. Shughart II on 12/20/99 of
Independent
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At the recent
meeting of the Advisory Commission on Electronic Commerce, the
Clinton administration issued its first policy statement on Internet
taxes. It should come as no surprise that, despite the president's
avowals that the era of big government is over, the policy statement
objected to proposals that would ban the collection of sales taxes
on Internet purchases.
Consumers buying products on-line currently enjoy the same
immunity from state and local sales taxes the U.S. Supreme Court has
carved out for mail-order catalog sales. The Court ruled a decade
ago that requiring retailers located in one state to collect sales
taxes from consumers in another unconstitutionally encroaches on
interstate commerce. Hence, sales taxes are due on mail-order and
Internet purchases only if the retailer has a "physical presence" in
the customer's state of residence. Although consumers in most states
are obliged to report and pay "use" taxes on items purchased
elsewhere, that requirement is rarely enforced.
In 1998, Congress imposed a three-year moratorium
on new Internet taxes to allow study of the issue, but with billions
of dollars worth of tax revenue at stake, the debate is heating up.
The supporters of legislation aimed at overturning the Supreme
Court's ruling argue that their goal is simply to restore
"neutrality" to the sales tax code, that is, to ensure that purchase
decisions are not distorted by differences in tax rates across
jurisdictions. Currently, they say, the existence of an Internet tax
haven places local retailers who must collect appropriate sales
taxes at an unfair competitive advantage relative to Internet and
mail-order retailers, and closing the Internet tax loophole would
not impose a new tax but simply level the retail playing field. The
partisans of Internet sales taxes also point to the fact that state
and local tax governments lose considerable tax revenue when
customers purchase items over the Internet from retailers located in
other jurisdictions – tax revenue that is sorely needed to finance
schools, roads, and other essential public services.
The opponents of such
taxation emphasize that electronic commerce does in fact generate
substantial revenue for state and local governments from a variety
of tax sources, including business and personal income taxes, and
that additional tax revenue is hardly needed at a time when the
economy is booming and most state government budgets are awash in
black ink. Moreover, given that there are some 30,000 separate state
and local tax jurisdictions in the United States, each of which sets
its own sales tax rate and applies that rate to a different mix of
goods and services, figuring the tax due on each Internet or
mail-order transaction would be an administrative nightmare for
retailers, most of which operate on very thin profit
margins.
Overlooked by
virtually everyone participating in the debate on Internet taxes are
the benefits to taxpayers of America's federal system of government.
As is the case in ordinary markets, competition between the nation's
30,000 separate state and local tax jurisdictions helps hold tax
rates down to their cost-effective minimum. If one state or city
imposes a sales tax rate that is too high in relation to the
quantity and quality of public services those taxes help finance,
its tax base will tend to shrink as businesses and consumers
relocate to other jurisdictions having lower taxes, better roads and
schools, or both. But moving is costly. The ability to avoid high
local taxes by making purchases over the Internet or through
mail-order catalogs supplies an alternative margin of competition
that forces governments to be more fiscally
responsible.
While it is true
that local retailers are thereby placed at a competitive
disadvantage, it is also true that mail-order businesses and
"e-tailers" have a competitive disadvantage of their own in the form
of the shipping and handling charges which their customers must pay.
Local retailers therefore have an opportunity to get business lost
to catalog sales or the Internet back. They can do so by providing
services consumers value – and are willing to pay for – or by
lowering their prices so that, inclusive of sales tax, the prices
they charge are equal to or less than those charged by Internet
retailers inclusive of shipping and handling charges. That is how
competition is supposed to work. When the playing field is instead
leveled by forcing Internet companies to raise their prices by
collecting sales taxes and remitting them to the treasury of the
state where the purchaser resides, the competitive market process is
short-circuited.
Proposals to
tax Internet commerce are nothing more than thinly veiled attempts
to protect inefficient local retailers and local governments from
the beneficial forces of competition. It is unwise public policy to
correct the "distortive" effects of the Internet tax haven by
introducing yet another distortion. This is especially true of sales
taxes, which are highly regressive, placing the heaviest tax burden
on low-income Americans. Far better to allow the flourishing
competition from e-commerce to help mute the distortions created by
existing taxes.
*William
F. Shughart II is the editor of the award-winning book,
Taxing Choice (Independent Institute, Oakland, Calif.) and
professor of economics and finance at the University of
Mississippi. |
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