E-Commerce, the Sales Tax, and Equity
Pressman, Steven
I N 1998, CONGRESS passed the Internet Tax Freedom Act. The law will keep Internet purchases virtually tax free until October 2001. It also created an Advisory Commission on Electronic Commerce....
...The basic idea behind the sales tax is that people are taxed on the goods they buy at the place they buy them...
...They favor either option (1) or (2...
...Firms increasingly have the ability to set up headquarters and warehouses anywhere in the world and to sell their wares from catalogs and Web sites...
...But its ten-to-eight vote fell short of the two-thirds majority that Congress had requested...
...Congress gave the commission six policy options to consider: (1) extend the current moratorium on Internet purchases for another five years, (2) prohibit any taxes on Internet transactions, (3) develop a system for collecting taxes on e-commerce, (4) recommend a national sales tax on e-commerce to be divided among all state and local governments, (5) recommend that state and local governments simplify their sales taxes, (6) recommend that state and local governments be allowed to tax Internet transactions the way they tax other commerce...
...Exemptions can easily be made for certain types of goods that cannot be purchased on the Web, but that require a physical presence at some location...
...Traditional firms are at a competitive disadvantage and may disappear even though they are preferred by consumers...
...Also, unlike the local bookstore, Amazon.com has costs associated with shipping goods to the consumer that a traditional business does not have...
...So Governor Janklow was rightly concerned about the impact of e-commerce on state finances...
...And sooner is better than later...
...There are also efficiency arguments in favor of Internet taxes...
...Small e-businesses, struggling to make it, may not survive as a result of this burden...
...These firms may be efficient, but we will never find this out if the cost of collecting and remitting sales taxes drives them out of business...
...And like politicians, the business split is based on selfinterest rather than sound argument...
...Who gets to tax me...
...His latest book is 50 Major Economists...
...Essentially, in a global economy, the sales tax becomes obsolete...
...Having a father who broke a "read my lips...
...After reviewing the case for and against an Internet tax, I will argue for a more radical solution to the fiscal problem posed by e-commerce...
...A Solution to the Dilemma Both sides to the debate make good arguments...
...it recommended that the moratorium on Internet purchases be extended for five more years...
...If states raise sales tax rates to compensate for lost revenues, the poor will bear a further burden: higher taxes on their own purchases so that better off Internet consumers can shop tax free...
...It is still learning how to engage in e-business efficiently—a typical problem for new, developing firms...
...It isn't yet clear whether e-commerce is an efficient way of doing business...
...The lower one's income level, the less likely one is to own a computer and to buy goods over the Internet...
...But they have each missed the key point about e-commerce...
...One participant was William Janklow, the Republican governor of South Dakota, who bragged that his state had no income tax and that he had recently reduced property taxes...
...But these are just educated guesses on my part...
...And what happens if the company selling to me is headquartered in Poland and has a warehouse in Mexico...
...Besides the loss of revenue, there are also equity issues connected with tax-free e-commerce...
...It gives the underdog a fighting chance...
...Even if we can figure out a way to impose a national sales tax on e-commerce, and a way to divide up revenues and distribute them to thousands of state and local governments, this will not solve the problem...
...Moreover, governor and presidential candidate George W. Bush has proposed reducing state property taxes and increasing sales taxes in Texas...
...When I travel to Florida, I pay sales taxes on my purchases there...
...Nationwide, state and local governments lost around one billion dollars in tax revenues during 1999 as a result of people buying goods over the Internet...
...Both of the major presidential candidates have come out against taxing Internet commerce...
...They are profitable, and they have been profitable for a number of years, so they can afford to lower prices and keep new firms from succeeding...
...The question, then, is not how or whether to tax e-commerce, but how to lift the taxes on regular sales...
...They take larger percentages of income from those who earn less...
...With millions of goods for sale, and thousands of tax jurisdictions, the process is daunting...
...For E-COMMERCE, THE SALES TAX, AND'EQUITY these reasons, e-commerce firms are at a competitive disadvantage...
...Given the sharp rise in incomes of the well-to-do over the past several decades, and the stagnant or falling incomes of everyone else, a more progressive tax system makes a lot of sense...
...What happens if I am in London or Paris rather than Florida when I click my mouse and buy something...
...But the main argument against an e-commerce sales tax has nothing to do with competition but rather with the practical problem of administering and collecting such taxes...
...Sales taxes are regressive in nature...
...Every jurisdiction has its own peculiarities...
...The brothers Bush find themselves in a similar predicament...
...Where seeing a product, or trying it on or out is important, e-commerce will not likely succeed...
...Congress viewed the problem too narrowly...
...First, local businesses are put at a competitive disadvantage compared to e-firms...
...If sales tax revenues begin to disappear with growing e-commerce sales, other taxes will have to be increased, or important state spending for education, roads, and public safety will have to be cut...
...Taking all taxes into account, the U.S...
...Typically, they do this by lowering prices whenever new firms try to enter the market...
...Each individual jurisdiction decides what should be taxed and what tax rate should apply to each good...
...To tax or not to tax e-commerce is not the question...
...Florida has no income tax, and relies on state sales taxes for nearly 60 percent of its revenues...
...STEVEN PRESSMAN is professor of economics and finance at Monmouth University, treasurer of the Eastern Economic Association, and North American editor of the Review of Political Economy...
...This means that states like Florida can eliminate their sales tax and institute a state income tax (and/or increase property taxes), and their residents will come out ahead of the game...
...First, many states currently impose both income and sales taxes...
...But even with the Sherman Act in place, established firms will always have an advantage over upstarts...
...If this condition is not met, the big guys will always take advantage of the small guys...
...Finally, as noted earlier, sales taxes are highly regressive...
...Janklow is not the only governor facing such problems...
...When it is possible to achieve both equity and efficiency at the same time, we should jump at the opportunity...
...52 n DISSENT / Summer 2000...
...So every time goods were bought and shipped, e-retailers would have to determine the appropriate tax...
...Supreme Court ruled in 1967 and again in 1992 that remote vendors could not be required to collect sales taxes on customers who live in a state where it lacks a physical presence...
...When I go to South Dakota and spend my money there, I pay the sales taxes imposed by that state...
...At present, some seven thousand state and local entities impose sales or use taxes of some sort...
...In addition, collecting the sales taxes imposed by thousands of local governments, and then sending the revenues to each of them, would impose a large administrative and financial burden on firms...
...After many hearings and much debate, the commission issued its final report in April...
...They must rely on the confidence of new investors for funds to expand and compete...
...The close vote and the option selected (the only option that does not make a final decision on the issue) reflect the divergent views throughout the country on taxing e-commerce...
...The only way to find out for sure which type of business is more efficient at selling different goods is to let them compete...
...they take bigger bites out of the incomes of the poor than the wealthy, because poor families pay sales taxes on a far larger fraction of their income...
...cities and states cannot force these foreign merchants to collect sales taxes for them...
...At present, state income and property taxes are deductible from federal income tax returns, but sales taxes are not deductible...
...Tax-free e-commerce thus lets the well-to-do avoid taxes...
...The real issue is whether we can and should have sales taxes in a global economy...
...Trade Representative Barshefsky, Treasury Secretary Summers, and Commerce Secretary Daley...
...Businesses, like politicians, are split on this question...
...With e-commerce growing ten-fold a year, tax losses to state and local governments will increase proportionately...
...Only on a level playing field will the more efficient firms survive and thrive...
...This solution, unfortunately, was not one of the options that Congress gave the advisory commission...
...Like most states without an income tax, South Dakota gets more than half of its tax revenue from sales taxes...
...Why should Amazon.com sell books tax-free when local bookshops have to charge sales taxes...
...This makes it virtually impossible for outside merchants to know what rate to charge...
...The big problem with a sales tax is that it is too easy to avoid, and impossible to collect, in a global economy...
...In contrast, new firms have no such margin...
...In brief, eliminating sales taxes would be more equitable than allowing e-commerce to escape taxation entirely and more efficient than trying to collect taxes from every state and locality...
...It relies on general sales taxes for 50 percent of its tax revenues...
...My best guess is that for books, toys, and CDs, firms like Amazon.com will probably thrive...
...But if we let e-commerce escape sales taxes, we favor firms that sell goods over the Internet regardless of their efficiency...
...In contrast, income taxes and property taxes are progressive in their incidence...
...The Case Against Taxing E-Commerce True competition requires opponents of equal size and strength...
...tax system is just barely progressive...
...Even if this problem can be resolved somehow, it is only the tip of the iceberg...
...They generally support an e-commerce tax because it will yield substantial revenue...
...Florida residents will pay lower taxes to the federal government and will not pay any more to the state government...
...State governments need to begin phasing out their sales taxes and replacing them with higher income and/or property taxes...
...There is no easy way for e-commerce retailers to figure out the local rate...
...Nor can we expect American citizens voluntarily to pay sales taxes on goods shipped from abroad...
...Tax rates do not correspond to something simple like postal ZIP codes...
...This tactic is designed either to scare away new firms or to ruin them...
...they take a bigger bite out of the wealthy...
...All other taxes on sales should be abolished...
...So, too, will the residents of every state that currently imposes a sales tax...
...Making for even greater complexity, jurisdictions frequently change their tax rates...
...In another year, or two, or three, the pinch will begin to be felt, and states will be forced to do something drastic to balance their budgets...
...Texas, too, has no DISSENT / Summer 2000 n 49 E-COMMERCE, THE SALES TAX, AND EQUITY income tax...
...The commission is made up of eight representatives from state and local governments (including three state governors and the mayor of Dallas), eight business representatives, and three senior federal government officials (U.S...
...Letting e-commerce escape taxation will hurt economic efficiency, which will hurt us all...
...The sales tax increasingly falls on those households too poor to have computers, Internet service, and credit cards...
...If I sit in my hotel room in Florida and access my server in New Jersey to buy a CD over the Internet from a company headquartered in South Dakota with warehouses in Texas, from where do I buy the CD...
...so, in the future, Texas will likely be even more dependent on sales tax revenues...
...Or, what is more likely, e-commerce will turn out to be a better way to sell some goods and a worse way to sell others...
...It should be remembered that Amazon.com has yet to make a profit...
...no new taxes" pledge, and then lost his bid for re-election, makes candidate Bush an unlikely supporter of a new sales tax on e-commerce...
...The Case for Taxing E-Commerce At the end of last year, the NewsHour with Jim Lehrer ran a segment about taxing e-commerce...
...It can ill afford to lose a large chunk of this money as more and more sales are made online...
...E-businesses want Internet sales to remain free of taxation, while traditional businesses, weary of losing sales to tax-free e-commerce, support taxing Internet sales...
...The question is whether we ought to have sales taxes at all...
...Sooner or later we will have to abandon it...
...Congress passed the Sherman Antitrust Act in 1890 to prevent large monopolistic firms from using their size to hinder competition...
...DISSENT / Summer 2000 n 51 E-COMMERCE, THE SALES TAX, AND EQUITY Abolition will have numerous benefits...
...Eliminating sales taxes saves these states money because they will have to monitor and collect one tax rather than two...
...Letting e-commerce escape taxation can thus be justified as a way to enhance competition between start-up e-firms and more established businesses...
...Why should Drugstore.com be able to sell vitamins, shampoo, and cosmetics tax-free when the local pharmacy must force its customers to pay as much as an 8 percent tax...
...But in the brave new world of e-commerce, things are not so simple...
...Short of military occupation, U.S...
...Another equity issue is distribution of the tax burden...
...There is also a good case to be made for taxes on goods like alcohol, tobacco, and firearms...
...It may be the wave of the future, but it 50 n DISSENT / Summer 2000 may also be a passing fad that cannot provide the necessary personal service of traditional retail stores...
...On the other hand, state and local government officials favor options (3) through (6...
...Things will get much worse if we keep e-commerce tax free...
...Second, residents of states like South Dakota, Texas, and Florida, which have high sales taxes and no income tax, will actually gain from this change...
...Similar gains will accrue to residents of states that eliminate their general sales tax and make up for the lost revenue by raising property and state income taxes...
...That is why the U.S...
...In this category we may include hotels and restaurant meals, gasoline, and even cars and boats...
Vol. 47 • July 2000 • No. 3
