The Internet Should be Taxed

The Internet Should be Taxed

In 1998, retailers sold nearly $8 billion goods and services to consumers over the Internet, or on-line, while business to business online commerce was valued at an estimated $17 billion. Business weekly magazine (June 22, 1998) predicted that Internet commerce would increase the U.S. gross domestic product (GPD) by between $10 billion and $20 billion annually by 2002. They argue that imposing new Internet taxes, at least during the next few years, would bog down the Internet's growth and stunt a sector of the economy that is currently flourishing. For now industry leaders say it is important to build consumer confidence in the Internet by refraining from imposing taxes or other regulatory barriers that may deter people from shopping on line. Internet retailers must charge a sales tax only if the company has some kind of physical presence, such as a warehouse or an office, in the state where the customer is buying the item. Otherwise, companies do not have to add the sales tax to the purchase price.

In 1997, Sen. Ron Wyden introduced the legislation that developed into the Internet Tax Freedom Act. The ITFA called for a moratorium of approximately six years on the taxation of Internet transactions, access, or communications. Wyden called the moratorium a "time out" period that would give the Internet the opportunity to continue to grow. The goal of the legislation was to give lawmakers and Internet industry time to figure out a national taxation policy. Many businesses, he says, would be scared away from the Internet if they were burdened with the responsibility of monitoring and enforcing a thicket of conflicting sales taxes imposed by various states and municipalities.

Indeed the potential loss of tax revenue for states and municipalities is one of the biggest concerns. Unlike the federal government, which does not impose a sales tax, states are heavily dependent on sales taxes to raise revenues. Sales taxes comprise 49% of tax revenues collected by the states, while state income taxes comprise only 33%, according to the federal statistics. Critics of the ITFA say that if states municipalities are not permitted to collect taxes on Internet transactions, they could lose much needed revenue that helps pay for government services such as highway construction and public education. Others say that not collecting sales tax from the Internet is inherently discriminatory since businesses that do not engage in electronic commerce must still charge sales taxes.