YOU ARE HERE: LAT HomeCollections

Taxing Internet Sales

The losses to state treasuries could amount to $20 billion in each of the next five years.

March 26, 2000

Whether consumer and business purchases over the Internet should pay the same sales tax assessed in stores started as a simple question of fairness, of treating all buyers and sellers alike. It has turned into a broader battle involving the electronic industry, anti-tax members of Congress and state and local authorities, all defending their own interests. A congressionally appointed advisory panel, after more than a year of deliberation, failed last week to muster enough votes to make a recommendation to Congress. That doesn't mean the effort should cease, but it will have to return to the original question of fairness: Is it just--or economically justified--to treat buyers on the Internet differently than all other buyers? The answer is no.

To California and the other 45 states that levy sales taxes, this is not an academic question. As untaxed sales over the Internet grow, state and local governments are losing billions of dollars in revenue. A study by the University of Tennessee estimates the losses to state treasuries will amount to $20 billion in each of the next five years. That's $20 billion less for education, public safety and transportation services that these local governments provide. To cities in California, where sales taxes finance government, the potential lost revenue is particularly stinging.

Congress last year imposed a three-year moratorium on Internet sales taxes to study the issue and give the new e-commerce industry a breather to grow. Yet even today, some Internet sellers admit they don't need special treatment to survive. They believe their business model gives them enough advantages over the bricks-and-mortar retailers to allow them to flourish on equal terms.

The states, under a 1992 U.S. Supreme Court decision, cannot require "remote," or out-of-state, retailers, including both mail-order houses and e-commerce sellers such as, to collect sales tax unless the retailers have stores, warehouses or service shops in the state.

Most states, including California, technically require purchasers to pay the tax voluntarily. These taxes, not surprisingly, go largely uncollected. The 1992 Supreme Court decision, while curtailing the states' powers to tax nonresidents, left room for change if the states and local governments agreed to simplify the tangled web of their tax systems.

This is what the governors of 44 states, backed by mayors and county officials, have agreed to do. They got together and last December agreed on a proposed "radical simplification" of sales tax collection. The plan would impose no new taxes, provide privacy protection for Internet purchasers and treat all retailers equally, resident of the state or not. The same technology that is making electronic retailing possible will make the sales tax collection as easy as a single click of the mouse.

A majority of the congressional panel recommended that the sales tax moratorium be extended for an additional six years--until 2007--to give the governors time to simplify complex state and local tax systems. That is better than the permanent moratorium called for in a handful of legislative proposals introduced in the House and Senate. But before extending the moratorium, Congress should work with the state officials to determine how long it would take to implement the governors' plan. Six years may be too long a period.

The question of taxing sales on the Internet is vital for local authorities that depend on it to provide basic services for their citizens. It does not, as some detractors in Congress claim, amount to imposing a new tax on e-commerce. It merely extends existing tax obligations to the "new economy."

Clearly, the dynamic new electronic retailers do not need this unfair advantage over the old retailers--whether they are as big as Wal-Mart or as small as the neighborhood clothing store. Fairness demands that they be all treated alike.

Los Angeles Times Articles