Principles for Making Electronic Commerce Fair and Modernizing
Sales Tax Systems for the 21st Century
State and local
governments depend on the retail sales tax to provide services police,
fire, education, transportation, health, and environmental quality to
citizens and businesses. The sales tax is the single largest source of
state tax revenue ($1.47 billion in 1997) and is a critical component of
thousands of local revenue systems in 25 states. From a federalism
perspective, the existing sales tax system works well: citizens and the
officials citizens elect to deliver state and local services make the
decisions about state and local sales tax revenues. Internet
commerce is a huge, important, and fast-grooving segment of the U.S.
economy. Business-to-business electronic commerce, a significant portion
of which is subject to sales tax, is growing at an astonishing rate and is
projected to reach $1.3 trillion by 2003. Business-to-consumer on-line
retail sales are growing rapidly as well. By 2003, it is estimated that
six percent of all U.S. retail dollars or $108 billion will be spent
on-line. As the result of
court decisions and Congressional inaction, most Internet vendors and
other remote sellers currently are not obligated to collect sales taxes
from consumers. The tax-free status of these electronic commerce
transactions violates the principles of tax neutrality by taxing identical
goods differently based solely on the location of the seller, puts local
merchants at a competitive disadvantage, and threatens the long-term
viability of the sales tax as a key source of state and local government
revenue. The gap between
those who use the Internet and those who don't is widening. According to a
recent report of the U.S. Department of Commerce, the Internet revolution
is bypassing the poor, minorities, and those who live in inner cities or
rural areas. Personal computers are present in 80 percent of homes in
which families make $75,000 a year or more but in fewer than 16 percent in
which families make less than $20,000. Falling computer prices have had no
impact on this "digital divide," and the chasm between the Internet haves
and have-nots is creating growing social divisions based on class and
race. The poor who most often buy goods and services in cash from local
merchants, are unable to take advantage of the increased choices,
competitive prices, and convenience that on-line shopping provides.
Because they pay sales taxes on their purchases to local retailers, the
poor also pay more for some goods and services than high-income
individuals who can avoid the sales tax by shopping on-line. While there are
approximately 7,400 jurisdictions that currently impose a sales tax, the
technology exists today to collect such taxes with a minimum of effort.
Numerous software companies have tax compliance systems that can
accommodate the existing diversity' in our nation's state and local sales
tax systems. The
Future The Advisory
Commission on Electronic Commerce has the opportunity to address the sales
tax equity problem before the disparities between remote sellers and
bricks-and- mortar retailers permanently distort the marketplace, forcing
state and local governments to raise taxes in other areas to offset sales
tax shortfalls. State and local governments strongly support technology
advances and the opportunities offered by electronic commerce, and urged
the Advisory Commission on Electronic Commerce to endorse the following
principles and actions: Competitive
Neutrality - All sales transactions should be treated equally, whether
that transaction is done in person, on the telephone, by mail, or on the
Internet. Remote sellers should not be a "protected class" among retailers
and should not receive a business advantage and preferential tax
collection treatment at the expense of local merchants. Any benefit,
advantage, or cost savings an individual or business receives from use of
new technology should be provided by the technology itself and private
enterprise, not through discriminatory policies imposed by government. Tax
fairness is important not only to establish a level playing field among
businesses, but also to promote social equity' among the fill] range of
American consumers and to preserve investments in communities. Expanded Duty to
Collect - Using its authority under the Commerce Clause. Congress should
authorize states and local governments to require remote sellers without a
physical presence in the state to collect use taxes on goods and services
sold into the state and remit those taxes to the purchaser's state. Federalism - The
federal system should not be weakened by denying state and local
governments the revenue they need to serve citizens and carry out
important national responsibilities. No federal action should preempt the
authority of state and local governments or their ability to determine
their own tax policies. Tax
Simplification - While the technology exists today to administer even the
most complex sales tax systems easily and fairly, the Commission should
encourage states and local governments to continue their cooperative
efforts to reduce the complexity and compliance burdens posed by existing
sales and use tax systems on remote sellers. Through voluntary programs,
state and local governments may wish to investigate and test approaches
that promote greater simplicity and uniformity in sales tax base
definitions, provide incentives for voluntary seller participation through
vendor collection credits and other means, and otherwise reduce the
burdens of tax collection. Submitted
to: Advisory
Commission on Electronic Commerce Submitted
by: Council of State
Governments, International City/County Management Association, National
Association of Counties, National Conference of State Legislatures,
National Governors' Association, National League of Cities, U.S.
Conference of Mayors. Date
Submitted:
September 9, 1999
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