The Internet Tax Freedom Act and sales tax.

• Author: Leslie, Lance

Electronic commerce allows parties to exchange goods and services using electronic tools. There are many forms of electronic commerce; each presents different sales tax issues for industry and state and local governments:

* Internet access. Internet service providers provide Internet access, e-mail service, browser programs and custom Websites.

* Retailing. Businesses advertise through Websites and cybermalls delivering products via common carriers, such as the U.S. Postal Service, UPS, Federal Express, etc.

* Digitized products. Businesses advertise their products and then deliver them through the Internet. Examples of products that can be sold and delivered in this manner include computer software, movies, music products, books, newspapers and magazines.

* Information databases. For a fee, users can subscribe to information databases accessed through the Internet.

* Gambling. Individuals may now gamble over the Internet. It is legal as long as the companies are set up in locations where gambling is legal.

* Stock trading. Investors may now trade stocks and manage their investments over the Internet. This provides a low-cost alternative to traditional brokers.

* Banking. Most banks are currently offering on-line banking.

Consumers appear to be moving away from the traditional forms of buying goods and services to the convenience of on-line shopping. This trend has state and local governments concerned about the potential loss of tax revenue. For example, many consumers are now buying computers and books over the Internet rather than buying the identical items at a retail store. Every time a consumer purchases an item over the Internet, there is a good chance the retailer is not required to collect the state's sales tax, thereby transferring the liability to a use tax imposed on the consumer. Because use taxes have historically not had a high compliance rate, states will no doubt lose sales tax revenue.

Businesses also have concerns about the taxation of electronic commerce. These concerns relate to tax system equality and the potential for multiple taxation on a single transaction. Businesses want states to impose sales tax on electronic commerce in the same manner as it is imposed on the more traditional types of commerce (e.g., mail order sales, generally not subject to sales tax). In addition, many businesses are concerned that more than one state may claim the right to tax, thus making the taxpayer subject to double taxation.

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