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U.S.: Internet Taxation Becomes A Growing Issue

  • Andrew Tully

On Wednesday (May 10), the U.S. House of Representatives approved legislation that would forbid taxation of Internet use until October 2006. The bill does not address taxing sales conducted over the World Wide Web, but as RFE/RL's Andrew F. Tully reports, the issue is very much on the minds of American politicians.

Washington, 12 May 2000 (RFE/RL) -- The Internet is bringing new opportunities to American commerce -- to buy, to sell, and now, perhaps, to tax.

There are two tax options for the Internet in the United States. One would impose an "Internet usage tax" on users. The other would impose sales taxes on items bought on-line, just as taxes are imposed on items bought at walk-in stores.

Practically nobody believes that the Internet usage tax is viable -- primarily because it is so utterly unpopular. But taxing individual Internet sales is considered more realistic, even if it may be more difficult to implement. And it would apply to all customers, anywhere in the world, of American on-line businesses.

Many Americans are contemptuous of any effort to introduce taxation to the Web. It is, after all, a free-wheeling communications infrastructure that defies even well-meaning intervention.

This was succinctly stated by U.S. President Bill Clinton in a recent speech to a telecommunications company outside Washington. He noted that China is trying to control its people's access to the Web. "Good luck," he said wryly -- and to applause.

In 1998, the U.S. Congress passed a law imposing a three-year moratorium on an Internet usage tax. The moratorium ends in October 2001. On Wednesday, the House of Representatives approved legislation that would extend that moratorium for five more years. It is so far unclear whether the measure will pass the Senate in the same form. In any case, it does not address taxing on-line sales. But the issue lurks in the background.

For the time being, such sales cannot be taxed. The U.S. Supreme Court -- America's highest court -- has ruled that taxes cannot be imposed on what are called "remote sales" unless the seller has a physical presence in the state where the commodity is delivered. Originally, this ruling applied to interstate telephone sales. It now applies to Internet sales as well.

But many local politicians say they need to tax Web sales. They are aware that many consumers are shifting much of their shopping from walk-in stores to Web sites. As a result, they say, their jurisdictions could lose as much as $20,000 in state, county and municipal sales taxes by 2003. Traditional retail stores agree. They believe that the tax savings gives Web vendors an unfair competitive advantage.

Claude Barfield is an economist who has written or edited six books on technology and trade. He told RFE/RL that taxing commerce on the Internet is not necessarily unfair, as long as the same goods are taxed in stores. But he said that the mechanisms of taxing on-line commerce can be prohibitively complicated.

"Part of the discussion has been that the states had to agree to simplify the incredibly complex structure about sales taxes, because you don't have just states but local and county, etc., etc. And Number Two, to actually see if the software is available to be able to handle this, so that your individual merchant would be able to, you know, would be able to just kind of plug in to a system. And that remains to be seen."

Barfield agrees that it would be easy to design software to calculate only state taxes. But then the complexities begin.

"The complication would be, how do you make the calculations as to what goes to the state, the local governments -- I mean there's just thousands and thousands of different rates in different places. So how do you divide it up even among the state? Do you let the state do it, divvying [dividing] it among its various local and regional -- even regional authorities?"

Adam Thierer is a specialist in business and technology at the Heritage Foundation, a Washington think tank. He says he is not necessarily a supporter of more taxes, but understands the need that states and municipalities have to raise revenue to pay for schools, roads and other essential services. And he says there is a way to eliminate the complexity from taxing Internet and other "remote" sales.

Thierer told RFE/RL that the sales taxes with traditional merchants are what he calls "origin-based:" If a customer buys a product at a walk-in shop, he pays the sales taxes of the city and state where the shop is situated. This should be applied to Internet and other "remote" sales, too, he says.

"If Amazon-dot-com, based in Seattle, Washington, sold something to us, then the sales tax of Seattle, the city of Seattle, and the state of Washington would apply, but no other sales tax would apply. So it would be a single taxable action; it would happen once, at the sale of the product's origin, which is Seattle, Washington, the headquarters; and then it's done."

Thierer says state and local government officials oppose this "origin-based" sales tax. He says they do not want to be in a position of adjusting their tax rates to compete with other jurisdictions.

"Now, to me, this is a good thing. I like the idea of having vigorous tax competition, and having -- keeping the states on their toes and making sure they don't put the burden too high on businesses and consumers in terms of sales taxes. But of course if you're a state governor or a local mayor, you hate this idea. The idea of tax competition is appalling. Because, after all, it would be much easier in their lives to keep the rates up, if not growing."

Thierer says he has no sympathy for these officials, and notes that because of America's booming economy, states and cities are enjoying unprecedented revenue surpluses. He says their complaints of losing money are disingenuous.

Only Congress can impose a tax on transactions that involve two states. And it is unclear whether they would do so. Wealthy technology companies oppose taxes on Internet commerce, and members of Congress are becoming increasingly aware that these companies can be generous donors to their election campaigns.

Whatever happens, the issue is very important to a growing number of people in America. And because of the ease of communication -- also brought on by the Internet -- these politicians know that they will hear directly from their constituents if they make the wrong move.