business activity on the Internet surges, can Uncle Sam be far
emerging online marketplace has generated debate over the taxation
of transactions on the Internet.
Policymakers and other stakeholders deliberate on whether
cyberpurchases should be subject to the same sales taxes levied on
brick-and-mortar retailing. At
present, online buyers pay no sales taxes. However, the supersonic
growth of the sale of goods over the Internet shows that there's
plenty of money at stake, and government is scrambling to take
part of the sweet Internet pie.
Government has imposed a 3-year moratorium on any new Internet
taxes set to expire in 2001. Pundits, however, say that the
Internet’s days as a no-tax zone are numbered.
Outlined below are the key arguments for and against
taxation of sales on the Internet.
is defined as all the commercial transactions that take place over
the Internet, including retail sales of products and services,
advertising, and business-to-business commerce. For the fourth
quarter of 1999 alone, official government estimates show that the
U.S. retail e-commerce sales amounted to $5.3 billion, accounting
for a miniscule but growing share of the total retail sales
estimated at $821.2 billion for the quarter. A January 2000 study
by Ernst and Young estimated that 39 million people shopped online
in 1999, up from 17 million in 1998.
the growth potential of e-commerce is great, as the number of
people connected to the Net increases. As of February 2000, NUA
estimates that 275.5 million worldwide are online. Forrester
Research, on the other hand, estimates that 56.3 percent of
households in the U.S. alone will be on the Internet in 2003.
shopping online is also quickly gaining acceptance worldwide. The
Direct Marketing Association says online sales will reach $31.1
billion in 2004 compared with $75.5 billion in catalog revenue,
while a few others believe that Internet revenue will surpass
catalog revenue by 2004. Though figures and estimates vary widely,
one thing is clear: electronic commerce will grow to account for
hundreds of billions of dollar a year in sales. E-commerce is
poised to take off as consumers take advantage of comparison
shopping, niche markets, and, importantly, the tax-free status of
goods bought and sold over the Internet.
debate over Internet taxation started several years ago, when
Internet was at its earliest stages. In 1998, the U.S. Congress
passed the Internet Freedom Act, which imposed a 3-year moratorium
on new Internet taxes. Presently, states
can still tax income earned through Internet service providers.
States can also apply local business license taxes to a service
provider when it is located in the same jurisdiction, and collect
sales taxes on products bought over the Internet, if the taxes are
imposed in the same manner as taxes on mail order products. The
Internet Freedom Act also set up the National Advisory Commission
on Electronic Commerce to recommend a course of action for
Internet taxation. Pressure is on this group right now, as they
must come to a decision by April 21, 2000, whether or not to
recommend taxing Internet commerce.
one side of the fence . . .
growth will produce sales-tax numbers that are simply too large to
ignore. Due to Internet’s income generating potential, state and
local policy makers are hard-at-work opposing any limits on their
efforts to reap revenue from the Internet for their treasuries.
These groups want to stop the loss of tax revenue through remote
sales of items over the Internet and are pushing for a variety of
changes to the current tax codes.
The main reason put forward is that the increased
acceptance of online retailing could potentially decrease the tax
coffers of cities and states.
The potentially taxable e-commerce events include access to
the Internet; digitized services sold on the Internet; and
tangible goods and services sold on the Internet.
claim that America's tax-free e-commerce really amounts to mass
tax evasion. Citing a
similar struggle with the mail order industry, they argue that
states lose $4 billion in sales taxes annually from catalog sales
since states, cities and counties lack the authority to capture
sales taxes on catalog sales if the mail-order business is
headquartered out of state.
are concerned that electronic commerce will result in the loss of
even more revenue; estimated at more than $10 billion per year by
2003. The loss of tax
base will impair the ability of state and local governments to
improve education, roads, public safety, health, low-income
housing, and many other essential services. They project that
exempting online purchases from taxes could result in 200,000
fewer teachers and police officers across the nation. Either
citizens learn to live with a deterioration of these services or
they must swallow higher state income and property taxes. Thus, it
is up to government to impose a big tax bite on Internet sales to
even the odds.
the call for Internet taxation fail, some state and local
officials have argued that they may be forced to raise other taxes
to make up for lost revenue. Or request the federal government to
cover for the budgetary shortfall. Sales taxes account for up to
40 percent of state revenues.
important argument put forward by pro-tax supporters us the
alleged unfair advantages Internet has over traditional retailers.
Exempting “e-tailers'' from sales taxes is said to give them a
competitive advantage over regular retailers. They point that
there is no fundamental reason to provide favored treatment to
online transactions over similar types of transactions offline.
Since other services that are important to the growth of the
economy are taxed, there is no reason to favor Internet access and
e-commerce. Thus, calling for the imposition of tax on all
Internet sales would ensure the protection of two things: the
revenue base, as well as “Main Street” businesses.
counter claims that taxing Internet will stunt its growth, the
pro-tax side cite the 1999 study by CIO
Magazine that 71 percent of consumers say they would e-shop
the same amount if Internet taxes were applied. Sixty percent of
respondents to a survey by the National Association of Counties
and U.S. Conference of Mayors favor the collection of sales taxes
on goods acquired through Internet retailers.
. . and on the Other Side
fear that the imposition of taxes would slow the growth and
opportunity of e-commerce, just before it fully gains a foothold
among consumers. They fear that introducing taxes now might
seriously impede the Internet’s growth at a critical stage of
early development. Extending the
moratorium will enable e-commerce, which is relatively new and
emerging industry, a chance to develop without the market
distortions caused by a haphazard tax structure.
anti-tax camp argues that the Internet, by its very nature, cannot
be regulated or controlled. Policymakers
and businesses opposed to Internet taxes argue that the Internet
should remain a "global free trade zone," unencumbered
by overlapping and discriminatory taxes imposed by the country's
30,000 taxing jurisdictions.
However, if taxes are
imposed on Internet commerce, this zone of freedom and opportunity
will become enmeshed in government bureaucracies.
According to research by Austan Goolsbee, an economics professor at
the University of Chicago Graduate School of Business, sales of
merchandise on the Web could plummet if consumers were forced to
pay sales taxes. After examining the purchasing habits of 25,000
online users, Goolsbee estimated that one in four would stop
buying on the Web if the sales were taxes in a way similar to
those in conventional retail settings, resulting in a 30% drop in
online spending. Online buyers are "highly sensitive" to
taxes, says Goolsbee, with many of them residing in high-tax areas
of the country."
similar study by the National Bureau of Economic Research in 1999
concluded that applying existing sales taxes to the Internet would
slash the number of online buyers by 25 percent and reduce online
purchases by 30 percent or more, thereby damaging one of the
leading sectors of today's booming economy. A December 1999 study
by BizRate.com also showed that nearly 60 percent of consumers
would make fewer purchases if they had to pay a sales tax on all
Internet purchases. The
tax issue, according to the BizRate.com’s Flash Survey study,
would have a greater negative impact on foreign merchants, as 30
percent of the respondents indicated that they would never buy
from an online foreign merchant if they had to pay tariffs on
important contention is the fact that the Internet is inherently
non-geographic. As Representative Chris Cox, author and sponsor of the Internet Tax
Freedom Act said: "The decentralized nature if the Internet
makes it impossible to establish the precise geographic route or
endpoints taken by any single transmission. This makes every
Internet transmission vulnerable to multiple taxation that could
stop this rapidly growing medium in its tracks."
Although state and local governments enjoy a significant
amount of freedom in determining their tax policies, their tax
discretion does not extend beyond their geographic boundaries.
Taxing the Internet may also drive away the dot.coms to locations
that do not tax them, if we impose taxes that reduce their
business. Many of the companies that engage in commerce over the
Internet do not have to be physically located in the United
States. An exodus of e-commerce companies could impact the growth
of Internet-related jobs, a loss that could hurt the economy.
Other opponents argue
that compliance with the thousands of differing local tax rates,
would be unduly burdensome on out-of-state companies, especially
for small businesses or for sellers of information goods that are
delivered online and often do not even have a customer’s mailing
Some argue that the Internet stimulates purchases at retail stores
and through catalogs. One study found that consumers spent $3.3
billion on Internet retail sales in 1997. But they spent more --
$4.2 billion - buying goods and services elsewhere after getting
product information online.
fate of Internet taxation – whether to prevent blanket taxation,
enact a taxpayer alternative plan, or impose the full gamut of
taxes – is still unknown. By
April 2000, the Advisory Commission must recommend the best
approach to taxation of sales over the Internet.
Should sales over the Internet receive preferential
treatment given the fledgling nature of e-commerce and its
essential role in the prosperity of the U.S. economy? Or should
Main Street be given a chance to compete against cyber-malls and
local governments be able to add online sales to their tax bases?
the taxman coming on the Internet?
As of November 28, 2001, President Bush renewed a ban on Internet taxes,
ensuring that the country's 130 million Internet users will not face new taxes
for at least another two years. Bush said the legislation which he signed into
law would ''ensure that the growth of the Internet is not slowed by additional
taxation and that holiday shoppers will not be burdened by new taxes on their
online purchases.'' Congress passed the original ban in 1998 to prevent states
and local governments from imposing new taxes that might discourage growth of
the new medium.