The Internet taxation issue can get confusing because the real war is not really about new taxes, but rather the collection of existing sales and use taxes. State and local governments are loudly complaining about lost tax dollars from Internet sales.
"The states are involved because sales tax, on average, makes up 38 percent of a state's revenue. If you don't solve the Internet problem, you're deconstructing the sales tax premise," says Illinois state Sen. Steven J. Rauschenberger, co-chairman of the National Conference of State Legislators task force on e-commerce.
Not so, says Adam Thierer, a fellow at the Heritage Foundation, a public policy organization in Washington, DC. "State and local governments are running at all-time record surpluses," he says. "They're taking in more money than ever before."
The thorny issue is "use tax," which is similar to sales tax. Use taxes exist in 46 states. Consumers are expected to record their out-of-state purchases, then calculate and pay the tax they owe when they pay their state income tax. "The use tax has been out there all the time," says Debra Callihan, an associate professor at Virginia Polytechnic Institute and State University in Blacksburg, Virginia, who has recently taught on e-commerce taxation issues. "Its become a big issue because so many people buy online."
But few people know the tax exists-and even fewer pay it. In Utah, according to Rich McKeown, chief of staff to Governor Michael Leavitt, less than half of one percent of Utah taxpayers actually reported and paid use taxes last year. Because its virtually impossible to police use-tax compliance, state and local governments want Internet retailers to collect the use tax for them.
"They could put a tax agent at the end of every driveway to collect a use tax as the UPS man comes by," says Bob Bowman, 45, former Michigan state treasurer and CEO of Outpost.com, one of the oldest online retailers of consumer electronics and technology products. "Where we have nexus, we'll collect taxes, and where we don't, we shouldn't have the burden of collection."