To Tax or Not to Tax
The opening of the 21st century marks the dawn of a new and fundamentally
different age of unlimited access to information and unlimited opportunities
to improve the lives of all people through the use of information technology.
The Internet and the personal computer will enable individuals and corporations
to purchase goods and services and to exchange information in a profoundly
In the past five years, Internet e-mail and World Wide Web sites have
transformed both personal and business information exchange around the globe.
In time, it will be as easy for business and individual consumers to buy
and sell from people across the globe as from people across the street.
The economic impact of this is enormous accounting for more than $300
billion in U.S. business last year alone. The Internet promises to level
barriers to market entry, provide all consumers with total access to all
product information, and connect all buyers to all sellers. It will effect
near perfect market competition classic, textbook competition that even
Adam Smith would marvel. Indeed, universal market access over the Internet
already is reducing the cost of doing business and providing access to untapped
markets, workforces, and suppliers. According to one national study, 56
percent of U.S. companies will see their products online by 2000, up from
24 percent in 1998.
Recognizing these massive changes on the economic horizon, the U.S. Congress
passed the bi-partisan Internet Tax Freedom Act (ITFA) in October 1998.
Co-sponsored by Rep. Christopher Cox (R-CA) and Sen. Ron Wyden (D-OR), the
Act placed a three-year moratorium on Internet taxation and established
the Advisory Commission on Electronic Commerce to review Internet taxation
issues. The Commission, which comprises a balance of public- and private-sector
representatives, is to report its recommendations to Congress by April 2000.
Its first meeting will be held on June 21 and 22 in Williamsburg.
The Commission will consider the competing goals of promoting the Internet's
economic potential, addressing state and local revenue needs and preserving
the privacy of those who log on. As with any new industry, a complex tax
burden can stifle development and growth. Yet revenue needs of states and
localities also are undeniable. Another concern is how other nations may
tax e-commerce and the international trade and U.S. competitiveness.
Traditional business and sales tax models were designed for the physical,
or pre-cyber world, where buyers and sellers transacted business solely
in stores. Today, there are 5,000 separate state and local tax jurisdictions
in the United States with tremendous variation in rates, product categories,
exemptions, and administrative approaches. It is a complex quilt of sales
tax requirements that significantly impedes inter-state marketers who could
be saddled with responsibility of administering and policing tax requirements
across U.S. and international boundaries.
The e-economy may require a re-thinking of established business practices
and existing taxation models. As buyers and sellers on the Internet do not
have to meet face to face in a given place, some argue that old tax models
may no longer fit the emerging e- economy.
Nevertheless, some state tax jurisdictions have begun to tax the Internet.
While the debate has focused at the state-tax level in the United States,
the issue has major implications for national sales, business, and income
tax models. If a buyer from place "a" buys goods and services
from a seller in place "b," where would the local government levy
its taxes? What about the worker employed by a business that operates and
sells its products in cyberspace? Which government body has the jurisdiction
to levy income taxes on that employee and business? The Internet has the
potential to undermine traditional forms of state and local revenues in
proportion to its huge social and economic benefits.
The Commission's challenge is to map the rules of engagement for a new
virtual-business paradigm. Whether existing systems of taxation can be modified
to adapt to the Internet or whether new models of taxation need to be developed
will be a key question. So too will be whether taxes can be imposed on e-commerce
while protecting consumer privacy. It is too soon to say how the Commission
will resolve these and many other issues. But our debates will be robust,
and our search for solutions will be open, honest and fair.