E-Commerce, the Sales Tax, and Equity

In 1998, Congress passed the Internet Tax Freedom Act. The law will keep Internet purchases virtually tax free until October 2001. It also created an Advisory Commission on Electronic Commerce. The commission is made up of eight representatives from state and local governments (including three state governors and the mayor of Dallas), eight business representatives, and three senior federal government officials (U.S. Trade Representative Barshefsky, Treasury Secretary Summers, and Commerce Secretary Daley).

Congress gave the commission six policy options to consider: (1) extend the current moratorium on Internet purchases for another five years, (2) prohibit any taxes on Internet transactions, (3) develop a system for collecting taxes on e-commerce, (4) recommend a national sales tax on e-commerce to be divided among all state and local governments, (5) recommend that state and local governments simplify their sales taxes, (6) recommend that state and local governments be allowed to tax Internet transactions the way they tax other commerce.

After many hearings and much debate, the commission issued its final report in April; it recommended that the moratorium on Internet purchases be extended for five more years. But its ten-to-eight vote fell short of the two-thirds majority that Congress had requested. The close vote and the option selected (the only option that does not make a final decision on the issue) reflect the divergent views throughout the country on taxing e-commerce.

Both of the major presidential candidates have come out against taxing Internet commerce. They favor either option (1) or (2). On the other hand, state and local government officials favor options (3) through (6). They generally support an e-commerce tax because it will yield substantial revenue. Businesses, like politicians, are split on this question. And like politicians, the business split is based on self-interest rather than sound argument. E-businesses want Internet sales to remain free of taxation, while traditional businesses, weary of losing sales to tax-free e-commerce, support taxing Internet sales.

After reviewing the case for and against an Internet tax, I will argue for a more radical solution to the fiscal problem posed by e-commerce. This solution, unfortunately, was not one of the options that Congress gave the advisory commission. Congress viewed the problem too narrowly. To tax or not to tax e-commerce is not the question. The question is whether we ought to have sales taxes at all.

The Case for Taxing E-Commerce

At the end of last year, the NewsHour with Jim Lehrer ran a segment about taxing e-commerce. One participant was William Janklow, the Republican governor of South Dakota, who bragged that his state had no income tax and that he had recently reduced property taxes. Like most states without an income tax, South Dakota gets more than half of its tax revenue from sales taxes. So Governor ...