Sales taxes are collected at the point of sale, by clerks in stores, waitstaff at restaurants, and automated pumps at gas stations.
But what do you do in cyberspace, where the bricks of stores are replaced by clicks of a mouse? Is is fair to require the "dot.com" companies to keep track of the different tax rates of over 3,000 taxing jurisdictions, and to somehow determine what rate applies to each customer? Technically, mail-order sales companies are required to collect sales tax on every order, but usually they collect -at most - taxes for items shipped within the state where the main warehouse is based.
If the sales tax collection requirement is imposed on Internet retailers and actually implemented, will the complexity of the collection process block the growth of e-commerce by small companies and the reduce the efficiencies of the Internet?
Governor Gilmore of Virginia chaired the Advisory Commission on Electronic Commerce (ACEC), which was "created by Congress to study federal, state, local and international taxation and tariffs on transactions using the Internet and Internet access." The study is clearly a political issue, with the possibility that policies could be implemented that would permanent block taxes on Internet sales. Presidential candidate John McCain was a key sponsor of the bill creating the Advisory Committee...
That would be to the benefit of some companies and regions, while hurting the economic growth of others. If Intenet taxes are banned permanently (the Internet Tax Freedom Act temporarily banned such taxes from 1998 until 2001), then regions with a high percentage of Internet-based companies will benefit. Bricks-and-mortar retailers worry that they will be saddled with a requirement to collect a high sales tax, while competitors selling via the Internet sell the same items at lower prices even after including the cost of shipping.
As described by the Commission, "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."
Changing tax rates is a highly-charged political opportunity. Governor Mike Leavitt of Utah, chair of the National Governors Association and a fellow Republican with Gilmore, is not allowing the Virginia governor to generate all the publicity... or get all the visibility associated with being a leader in determing policy on Internet taxation. On November 16, at a National Press Club announcement, Leavitt said "We all despise taxes - but if we have to have them, above all they have to be fair. That's the American way."
The National Governors Association is concerned that a potential Federal tax on Internet sales would streamline the tax collection process, but would pre-empt the ability of the states to set their own tax and budget policies as well as discriminate against existing non-Internet businesses. States fund 40% of their budgets through the sales taxes they collect. In a November 10, 1999 news release, the National Governors Association said: "Exempting online purchases from sales taxes discriminates against Main Street businesses like corner drug stores or clothing stores at the mall. Brick-and-mortar stores have to collect and remit taxes to state and local governments for the exact same goods that would be sold tax-free over the Internet. Government s role should not be to subsidize one type of merchant at the expense of another." In a separate statement, the same organization says "The interest of the states is to ensure that every American is treated equally and that taxation is based on if they buy, not how they buy and where they sell. Governors want to create a level playing field for all retail businesses."
"All retail businesses" could be translated into "rural businesses." In addition, the National Governors Association notes that low-income consumers in inner cities, with less use of the Internet, would absorb a higher percentage of the tax burden if Internet sales were exempted from sales taxes.