Internet commerce and state/local sales taxes.

• Author: Esser, Jeffrey L.
• Position: Editorial

As millions of people increasingly turn to the Internet for the latest information on a multitude of interests as well as communications with friends, families, and business associates, the possibilities seem endless. State and local governments, also relying on the Internet for telecommunications and the improved delivery of services, are supportive of its continued development. They are convinced that the continued growth of the Internet is an important component of state and local government efficiency and of the nation's future economic health and vitality.

The continued viability of state and local revenue systems, which support essential safety, health, educational, and environmental services, is also essential to a healthy national economy. But as more and more businesses are using the Internet to market their products and services, more and more people are using the Internet to purchase them. It is now projected that billions of dollars in sales will be shifting to the Internet each year, with perhaps one trillion dollars in commerce on the Internet by 2010.

What are the implications for state and local governments of this trend toward buying and selling on the Internet? Purchases made from local merchants for everything from clothes to automobiles contribute to the tax base that supports state and local government services through the sales taxes paid to these merchants at the time of the transaction. Bills are now pending in Congress that would establish a virtually "tax-free" zone - some have referred to it as the "Cayman Islands of taxation" - for goods and services purchased via the Internet. Under the proposed "Internet Tax Freedom Act," there would be a moratorium on the collection of state and local taxes for goods and services purchased through the Internet. If this commerce becomes tax free, local Main Street merchants will be put at a tremendous competitive disadvantage and there will be a staggering loss of revenue to states and localities.

Local merchants will be disadvantaged for several reasons. First, Main Street businesses must own or rent a place of business and have a staff available to serve the public. They normally must maintain some basic level of inventory. While some businesses operating over the Internet incur these same expenses, many have centralized, highly automated operations, fewer overhead expenses, no local store, no local employees to pay, and minimal inventory.

Even more significant is the fact...