With the Internet growing in popularity every day, traffic on the Internet has doubled every 100 days (NCPA); the thought of taxing the Internet has become a heated discussion. Proponents of the tax say it will generate large profits for local and state governments through sales tax. While opponents state that the public has become accustomed to not paying taxes online, and that taxing would slow the rapid growth of Internet commerce.
The Clinton administration has decided not to tax transactions made over the Internet — for the time being. Clinton adviser Ira Magaziner says the Net should be tax-free for at least five years. Presidential candidates seem to have also aligned together to pledge how they would stop the taxman plunging his grubby hands into cyberspace. In some respects, a further ban on new Internet taxes is neither here nor there, because the real problem is the difficulty of collecting those old taxes that should already apply to e-commerce.
According to the National Center for Policy Analysis s study of the Commerce Department, online commerce is expected to reach $300 billion by 2002. The Internet has been responsible for a one-percentage-point drop in inflation and is growing twice as fast as the overall economy. A report from the Department of Commerce recommends that electronic commerce not be “burdened with extensive regulation, taxation or censorship” (NCPA). Those who oppose Internet taxation predict that any move to collect such taxes would swamp the courts with lawsuits over jurisdiction.
Another point made by opponents of Internet taxation states that if a sales tax were implemented, online sellers would simply move offshore. Also states without sales taxes gain economically; Oregon, for example, is already outpacing states with sales taxes as the location of choice for Internet merchandisers. Elimination of a state sales tax may induce businesses to locate in a state, where taxes on business and its employees will eventually exceed the lost sales tax revenues (Is Sales Tax).
Historically the vast bulk of goods and services people consumed were purchased in the immediate vicinity, so a sales tax made sense. However, two developments are altering the basic assumption on which the sales tax rests, growth of sales over the Internet and growing share of output that is in the form of services, rather than physical goods (. This may not seem much of a problem now, while the state coffers are overflowing with money and e-commerce is in its infancy. But the longer nothing is done, the more customers will become accustomed to avoiding taxes when shopping online and the more unpopular will be any attempt to change that situation (Economist).
The Economist. Taxing the Internet. [Online] March 25th – 31st 2000
National Center for Policy Analysis. Regulation Policy: Taxing the Internet. [Online] http://www.ncpa.org/pd/regulat/regapr98g.html.
National Center for Policy Analysis. Is the Sales Tax Obsolete? [Online] http://www.ncpa.org/ pi/taxes/pd032400e.html.
Mings, Turley. The Study of Economics, Sixth Edition. Dushkin Publishing Group, United States, 1999.