Spend and Tax?

• Author: CROSBY, JOSEPH R.
• Position: Brief Article

To tax or not to tax Internet purchases -- that is the question.

How important is the issue of tax, specifically sales and use tax, vis-a-vis electronic commerce? To listen to those on both sides of the argument, sales and use taxation of items bought over the Internet will make or break not only e-commerce, but also traditional bricks and mortar retailers and state and local governments. One side says e-commerce is why the economy is blooming, and that to tax it in its current embryonic state will spell doom. The other side is populated primarily by retailers and state and local governments. Retailers maintain that not taxing Internet purchases gives e-tailers a significant competitive advantage. State and local governments claim that if e-commerce isn't taxed, their coffers will dwindle, leaving houses to burn, criminals free to roam the streets and children to go uneducated.

The primary issue at stake is "nexus." Simply put, nexus implies a minimum contact with a state to trigger a tax collection responsibility on behalf of the merchant selling the goods in State A from the purchaser in State B. Current law is lenient on the requirements that cause a merchant to have nexus. That means, for the most part, sales tax is due only on remote purchases made where the customer and merchant are in the same state. Of course a purchaser in State A who buys online from a merchant in State B owes State A a use tax on the purchase, assuming State A imposes such a tax (currently 46 states do). But only a small percentage of consumers comply with state use tax laws, which are difficult to enforce.

In October 1998, Congress enacted the Internet Tax Freedom Act (ITFA) as part of the fiscal 1999 omnibus spending bill. The act imposes a three-year moratorium on the taxation of Internet access, and on multiple or discriminatory taxes on e-commerce. In theory, ITFA's enactment closed a nearly two-year effort to prohibit multiple and conflicting taxation of the Internet while allowing states and the business community to craft a more uniform taxation policy. Note that this act didn't restrict the sales and use taxation of remote sales made via the Internet,

The act also called for the creation of the Advisory Commission on Electronic Commerce. Its 19 members include the secretaries of Commerce and Treasury, the U.S. Trade Representative, eight representatives of state and local governments and eight representatives of the e-commerce industry. Its charge is to...