As John Berthoud of the National Taxpayers Union stated in his testimony before the U.S. Senate Committee on Commerce, Science, and Transportation, "government should not act unless there is a clear and compelling reason to do so."¹³ States are not losing money because of their inability to tax out-of-state Internet sales-tax collection at the state level has grown at almost twice the rate of inflation and population over the past six years.¹⁴ Although many Internet taxation proponents argue that it is unfair some forms of e-commerce go untaxed, these businesses, like most others, are already overtaxed. After having paid corporate income taxes, personal income taxes, sales taxes, property taxes, and hundreds of fees and levies, no business goes untaxed, let alone under-taxed.

States clearly have the ability to tax items purchased over the Internet when the buyer and seller are both located in the same state or when the seller has a significant physical presence in that state. Many states have actually chosen not to do so. This past August, the California State Assembly passed legislation that, if signed, would have forced any retailer with stores in California to collect sales taxes on products sold over the Internet to California residents.¹⁵ Governor Davis vetoed the legislation because he felt that it would harm California businesses. This is an example of how interstate tax competition forces legislators to weigh their tax and spending urges against their desire to remain business-friendly.

Exempting e-commerce from sales and use taxes would either require a federally legislated prohibition, as proposed in the 106^th Congress by Representative John Kasich, or state-by-state legislation banning Internet taxation. Such legislation is not likely to originate at the state level because many state legislators and governors are among those pushing the Streamlined Sales Tax. These officials have no desire to see their ability to tax e-commerce restricted further.

This leaves Congress to propose legislation specifically exempting e-commerce from sales taxes. Unfortunately, a federally legislated ban on e-commerce taxation is likely to run aground on constitutional issues. This is the flip side of the constitutional impediment to the states’ plan for a sales tax cartel. Any ban on taxation of Internet commerce emanating from Congress would surely be challenged under the Commerce Clause, Article I, Section 8 because it prohibits states from collecting taxes on sales made within their own borders.

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