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Internet's Taxing Nightmare
The Washington Times, July 2, 1999
By Aaron Lukas
The U.S. Advisory Commission on Electronic Commerce met this past
week in Williamsburg, Va., to discuss the future of Internet taxes. The
meeting had state and local politicians sweating, but not from the summer
heat.
It's a fascinating story. States are awash with cash right now, but
fear the good times won't last. As more people engage in untaxed cross-border
shopping over the Internet, politicians argue, state sales tax revenues will
plummet. The National Governors' Association says state governments could be
"losing" up to $20 billion a year by 2003 (a wildly inflated figure,
by the
way). So these "forward-thinking" leaders are seeking to boldly tax
where no
state has taxed before. Electronic commerce: the final fiscal frontier.
Their success is far from assured. Under federal law and the U.S.
Constitution, a state can exercise only limited powers beyond its own
borders. Thus, a state cannot force an out-of-state business to collect sales
taxes
unless that business has some physical connection to the taxing state -- a
legal concept known as "nexus." Consumers are supposed to voluntarily
pay a "use
tax" on all out-of-state purchases. Few people are aware of that
obligation,
however, and no state has ever made a serious effort to let them know.
In the past, most commerce took place within state lines so states did not
view the restriction on their taxing authority as a major problem. The rise
of mail-order sales prompted states to sound the alarm, but the predicted
revenue crisis never materialized. Now they're at it again. As Dean Andel, a
member
of the Advisory Commission, has noted, "There was a time in the early 1980s
when mail order was growing at rates comparable to today's Internet sales.
During those years, the same pro-tax lobby who is now beating the drums to
tax the Net was calling to tax mail order sales."
This time the states are proposing a compromise. Congress would authorize
them to force out-of-state firms to collect sales taxes. In exchange, a
single tax rate would be set for each state, making it easier for businesses
to calculate how much they're supposed to collect and for whom. The states
figure such a deal would bring more businesses into the pro-tax camp. Some large
on-line vendors love the idea, since they collect taxes anyway and figure
the plan would disadvantage smaller competitors. It's a win-win situation for
big
business and state and local government; only taxpayers and small businesses
lose.
State officials rightly fear a public debate over their plan. State
and local tax rates were set at a time when restrictions on cross-border tax
collection were the norm. It's impossible to "lose" revenue that was
never anticipated,
but allowing states to tax remote commerce would raise new revenue -- a de facto
tax increase that would escape voter scrutiny. That's a dream scenario for
politicians, but a nightmare for taxpayers.
So instead of openly campaigning for higher taxes, state officials are
hawking fairness. In-state businesses have to collect taxes, they say, so
why not make out-of-state firms do the same thing? That brilliant strategy
has paralyzed potential opposition from groups like the U.S. Chamber of Commerce
that fear offending "Main Street" retailers.
But most Americans realize it isn't right to force out-of-state firms
to act as tax collectors when they don't benefit from state services. When a
local business collects sales taxes, there is a clear link among taxes paid,
services provided and legislative representation. Local firms benefit from
police and
fire protection, roads, waste collection and other services, so it is proper
that
they help cover those costs. Remote sellers do not enjoy any of those services.
As Commission member Grover Norquist has said, the problem for Main
Street "isn't the Internet; it's the high sales tax rates." Clearly,
the
fairness argument is intended to distract from the real agenda of covertly
raising taxes. If not, states would lower rates as they broaden the sales tax
net.
With most state budgets in surplus, taxpayers should reasonably expect any
reforms to
be revenue neutral at a minimum. California's Electronic Commerce Advisory
Council has recommended that each state "review the tax-base-broadening
revenue impact of the new system and consider reducing its sales tax rate,"
but such advice is rare.
If a fiscal crisis is really on the horizon, states have only themselves to
blame.
In 1998, many governors submitted budget proposals that increased
spending
by more than 7 percent, roughly 3 times the rate of inflation. States
estimate
an average increase in general fund spending of 5.7 percent for fiscal 1998
and 6.3 percent for fiscal 1999, with only 2 states reducing
their
fiscal 1998 enacted budgets. That's almost twice the rate of inflation plus
population growth.
At the end of the day, the battle over Internet taxation has little to
do with equity or a shrinking tax base. The reality is much simpler: state
officials want to control an ever-expanding portion of our incomes.
Electronic commerce, by providing a means to avoid punishingly high sales
tax
rates, threatens to check that impulse. No wonder politicians are sweating.
Aaron Lukas is an analyst at the Cato Institute's Center for Trade Policy
Studies.
Copyright © 1999 News World Communications, Inc.
This above article is reprinted with special permission
granted
to the IBA from The Washington Times.
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