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 new way.

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.