The Pros and Cons of Internet Taxes

Is Local Tax Enough?

Jones: We do have the authority to collect sales and use taxes. But having the authority and the ability are two different things. State and local governments rely on the seller to collect sales and use taxes from customers at the point of purchase. We know of no other effective way of achieving this. So we think it's only fair to require Internet companies to collect sales and use taxes, provided we make collecting such taxes easy and simple. We concur with those who say the current tax system is overly complicated and burdensome. To require business owners who sell to customers in multiple states to keep up with thousands of taxing jurisdictions, different tax rates, rules and administrative procedures is just too much.

However, we do believe that technology is available today that will enable us to come up with software all sellers can use that will provide them all of the information they need at the point of sale. State and local governments are in the process of working together to create such software, so it can be made available to all sellers.

McClure: The concept of "enough" doesn't fit well in this discussion. Who gets to decide what is "enough" vs. too little or too much? Generally, the state legislatures make that call. And in virtually every state where the matter has come before the legislature, those bodies have ruled not only that sales taxes are enough but are too much. From the perspective of the taxing authority, whose job it is to maximize the amount of tax revenue, the opposite is true-not only can there never be too much, there can never be "enough."

Should the Internet Be Taxed at All?
McClure: Of course Internet businesses should be subject to taxes--according to the same rules as other, similar businesses. As a nation, we have decided that it is counter-productive to tax access to the Internet if our goal is to have every home, business, school and library connected. That only makes it more difficult financially to reach our goal. But note that the U.S. Supreme Court, again in the decision in Quill vs. North Dakota, ruled that sales and use taxes are payments for services rendered to a business--fire and police protection, well-managed roads that lead to the business, and similar services provided by the state. Businesses that use these services should pay for them. Conversely, businesses that do not use these services should not have to pay for them. Thus was created the concept of nexus. If a business has nexus, it is making use of services from the local state and should pay for them. Those that do not have nexus are not using the services and should not be coerced into paying for them.

As for the lost revenue. . .well, what lost revenue? So far, other than a host of "Chicken Little" projections, most of the evidence seems to point to the opposite. To claim that revenue is being lost would infer that every transaction on the Internet would otherwise be conducted in a local store. In point of fact, there is no credible evidence that the sales of local stores are--or ever will--be threatened by Internet sales. Rather, the Internet competes more directly with catalog and telephone sales, where taxes are also not collected. Even if revenues did someday decline, that would simply reduce the number of businesses using state services--meaning less traffic on the roads, fewer fires, etc. That means the state could make a commensurate reduction in the services it provides, since those services would not be as greatly needed. Fewer cars on the road, for example, translates to less wear and fewer re-pavings.

Jones: We believe most state and local officials would agree that the Internet itself should be taxed. They don't believe a person should be taxed to access the Internet. But they do believe that if a person goes onto the Internet and orders goods and service, those goods and services should be taxed just as if they were purchased over the counter. We don't think customers should be taxed every time they access the Internet, just as they aren't taxed each time they walk into a shopping mall.

Should Dotcom and Brick-and-Mortars Be Taxed Equally?
Jones: The whole idea of having companies collect taxes is based on the nexus concept. If a company is located within the borders of a state, the state and its local governments have the authority to require the company to collect their taxes. We think state and local governments should be given authority to require dot coms to collect their taxes, when they sell to customers residing in their areas. That's what we will ask Congress to do. When a person walks into a store and purchases a suit, that local retailer is responsible for collecting the state and local sales taxes. Again, dot com companies should be required to do the same, as long as the process for obtaining tax information is simple and easy. Businesses shouldn't have to figure out the different tax rates for this state or that locality or what is exempt and what is not exempt. They should have all of that information provided to them in a simple way. Again, through use of technology, we think this could be provided in software.

McClure: The discussion is simpler if you view taxes as payment for government services rather than government-sponsored extortion. Though taxing authorities favor the "give us your wallet" approach, the courts have consistently held that they must actually provide something in return for the money they collect. So consider the dotcom vs. the brick-and-mortar business. Are both using the services of the state? Those that use the services should pay. Those that do not should not pay. The continuing attack on the Internet tax moratorium is an admission by the states that they wish to collect taxes without providing a service in return.

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