The Pros and Cons of Internet Taxes

Is It Fair Not to Tax an e-Business?

McClure: What's "fair" about being forced to pay for services that are never rendered? We used to call such schemes a "protection racket" and prosecute those who operated them. Go back to the Supreme Court decision: The brick-and-mortar businesses collect and remit sales taxes as a payment for the services they receive that enable them to operate more efficiently and profitably. The sales tax is not based on where the customer is located-it's based on what services the business uses in its physical location. And to the extent that an Internet company uses services in its physical location, it should pay as well. The "use tax" was conceived as a way to make consumers pay for the services the businesses do not receive. That is, since there is no legal authority to charge a sales tax, the states implemented a "use tax" dedicated to the idea that somehow the state is entitled to the money anyway. Such taxes are almost never collected, since to do so would bring taxpayers to ask what the money is for.

Jones: It certainly is unfair to allow dotcoms to sell goods and services tax free when local retailers are required to collect taxes. It gives dotcoms an unfair competitive advantage. When you talk about big ticket items such as a computer that may cost $3,000 or $4000 and a resident of, say, New York purchases it in Oregon or Delaware-where there is no sales tax-he or she could save as much 8.5 percent. This could be a significant savings. That kind of thing would be unfair to local retailers.

It is also unfair, because most often when such goods as computers are sold over the Internet, they depend on local infrastructure supported by the sales tax. These goods must be transported over highways or streets, or use local airports, and receive protection from state or local police. All kinds of services kick in. How is it fair for a local retailer to partner with government by collecting taxes, and not have dotcoms do the same? All businesses would be required to do is collect what is rightly owed to state and local governments. It's not like they're paying money out of their budgets. This is not too much to ask of businesses, which depend heavily on the local infrastructure for the free flow of commerce.

Without a Tax, Will More Businesses Flock to the Net?
Jones: I would answer this way. It may not encourage them to eschew brick-and-mortar businesses, but they could set up a separate company for Internet sales, which might enable them to achieve the same effect. Instead of getting out of bricks and mortar, they could sell everything over the Internet and thereby avoid the responsibility of collecting taxes. For example, a company with stores in multiple states might set up kiosks in all its stores so anything can be purchased over the Internet. Customers in each store could use the kiosks to make purchases over the Internet [from the separate Internet company located in a different state], then go over to a counter [in the store] and pick it up. Under such circumstances, many believe the company would be under no obligation to collect state and local taxes.

McClure: It might, though what is their incentive? It's not as if the firms can just put that tax money in their pockets. It does mean less paperwork, less bureaucracy and more time for the business owners to focus on running their businesses. But remember that only a very few businesses can conduct their transactions over the Internet. We're still sorting it all out, but we're finding that things best purchased in a physical store are still best purchased in a physical store. In some cases, use of the Internet allows businesses to conduct transactions more efficiently, at a lower cost, and these efficiencies can be passed along to consumers. That's a good thing-for the businesses and for their customers. And that happens regardless of whether the transaction is subject to tax.

Should We Create One Taxing Body?
McClure: You mean, shouldn't we create yet another humongous federal bureaucracy so consumers could pay more and higher taxes to fund it? Call me crazy, but that doesn't strike me as a good idea. Consider the other possibility: There is a set of services that we, as business people, have determined are good for us and that we wish to see continue. We also wish to have these paid for on a fair basis, so that companies who use more of the services pay more, and vice versa. We know that the old models of sales, in which people shopped in their local neighborhood stores or went to town on Saturday to do their week's buying, don't apply anymore. And since that concept of sales is the basis for the sales tax, the whole notion of a sales tax is pretty obsolete. Some sales are local, some are not. If we accept the fact that we have to come up with some way of paying for the services and that sales taxes as presently structured won't do the job in the global economy of the 21st century, then we need to begin work on a replacement to the sales tax. Not a slap-on-any-old-tax approach. Not a band-aid. But meaningful reform of the tax structure that will result in a new and better way to fund government services fairly and honestly. That was the intent of Congress in passing the Internet Tax Freedom Act-to begin work on that new way. But as long as the states believe they can simply out-wait the moratorium and slap any old tax on the Internet, that badly needed reform will never take place. That is why an extension to the moratorium was introduced on April 7 [in 2000] in the House and Senate.

Jones: We're really strongly opposed to the idea of single taxing body. Our nation is not a nation of one but of many people and many units of government. Many states, counties and cities have different needs. People have different desires. One of the beauties of our country is the fact we have widely diverse groups of cities and counties that make their own laws rules, regulations and taxes based on what the citizens believe is best for them. It would be a sad day in this country, if legislation were adopted that eliminated the taxing authority of states and local governments. This would not only be contrary to our nation's constitution, but would stifle the creativity and innovations that so often come out of cities in response to the need to solve all types of public problems. Good ideas, many times, flow from the bottom up.

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