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Challenges of 'E-Commerce'

July 19, 1998

Keep an eye on E-commerce. That's the buzzword for all the goods and services--travel, books, cars, groceries, real estate--now sold and purchased on the Internet. Business transacted on the Net, while only about 1% of the nation's economy, is skyrocketing, and that's helping drive prices of Internet stocks such as Yahoo and Amazon.com to astronomical levels, far beyond what's justified by their actual value and profitability.

If E-commerce takes off as projected--with consumer sales rising 233% to $20 billion by 2000--long-term investors will end up happy. But for all its Wall Street allure, E-commerce poses challenges to traditional ways of doing business, from pricing to employment.

Cities and states will have to rethink the current paradigm of economic development and taxation. Are mega-stores and shopping centers less essential in an E-commerce world? Can business on the Net somehow raise the same revenues for states and cities as stores and offices? Will jobs be lost? These hard questions are the thorny side of E-commerce; its rosier side is lower prices for shoppers, lower costs for businesses and more discretionary time for harried consumers and families.

Already, savvy consumers are buying big-ticket items like computers online, often from a supplier in another state. In many states, consumers do not have to pay sales tax on a purchase if the seller does not have an outlet or office in their home state.

Skillful Net shoppers are finding cheaper air fares and other bargains. Same for the growing number of businesses buying from and selling to each other on the Internet--one of the fastest-growing segments of E-commerce.

As E-commerce alters traditional ways of doing business, many states, including California, are grappling with the impact on their tax revenues. Some see new revenue opportunities in taxing Internet transactions, well beyond purchases. But Congress, concerned that haphazard state, local and national taxation might impede E-commerce, is considering a three-year moratorium on new Internet taxes. In that time a congressional panel would study Internet taxation and propose uniform standards.

The moratorium and study would be a solid start. E-commerce is uncharted territory, borderless and as hard to grasp as Flubber. But with states and companies, especially in California, poised to cash in on this new form of doing business, the tough policy questions have to be understood.

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