Internet Taxation Schemes Threaten Consumers' Privacy

By Smith, Frances B. | Consumers' Research Magazine, October 1999 | Go to article overview

Internet Taxation Schemes Threaten Consumers' Privacy


Smith, Frances B., Consumers' Research Magazine


Increasingly, consumers with access to the Internet are finding that on-line shopping offers numerous benefits. While not yet a "mainstream" source of purchasing, Internet shopping continues on a strong growth curve.

According to Forrester Research, on-line business trade will soar to $1.3 trillion by 2003. It is clear that an increasing number of consumers value the Internet for ease and convenience of shopping and the wide selections available, ranging from the mundane to the highly specialized. No matter what one's shopping interests--1940s toasters to high performance computers--Internet vendors are there.

The growth and development of the Internet and its commercial activities are a remarkable story of vibrant entrepreneurship, where protocols, standards, and conventions have been developed and modified at a swift pace. The very uniqueness and complexity of the Internet cause great support on the one hand and great fear on the other--especially fear of losing tax revenues.

Two years ago Congress passed a three-year moratorium on Internet taxation and created an Advisory Commission on Electronic Commerce to come up with recommendations on handling local, state, and federal tax issues associated with electronic commerce. The Commission, chaired by Virginia Governor James Gilmore, includes state and local office holders and tax authorities, telecommunications, computer, and other firms, as well as a taxpayer group.

The questions at issue for the Commission are whether e-commerce should be taxed; and, if so, how. Many state, county, and local jurisdictions, fearful that the growth of the electronic marketplace will decrease their tax revenues from traditional retail sales, are presenting the specter of decreasing services for their citizens because of budget shortfalls. Thus, many in that sector support new tax schemes for the Internet.

One of the principal arguments raised by tax proponents is that retail stores have to charge sales taxes to their customers when they make purchases at retail locations. Mail order firms, however, don't charge sales tax, unless the company has a "nexus" or a physical presence in a state. If a customer in Florida buys something from a catalog store in Maine, then the consumer generally doesn't have to pay taxes on the purchase.

Part of the rationale for that approach is that states shouldn't be allowed to tax other states' residents; to do otherwise would result in taxation without representation.

However, that concept would be turned on its head by some proposals to tax Internet purchases. Since much of e-commerce takes place between remote locations, with buyer and seller located in different states, some have said that e-commerce taxation should follow the model of catalog sales.

Another proposal offered to the Commission urges that consumer purchases over the Internet should be taxed by the jurisdiction where the consumer resides. However, this approach assumes that the seller would have the purchase delivered to the buyer and thus would have data on the consumer's residence; but this isn't necessarily so on the Internet. Many on-line purchases are digital, such as downloads of software or music. Different schemes for purchases of tangible items vs. digital products are also an issue in the taxation discussions. Those issues cannot easily be decided by numerous competing interests involved in the debates.

If Internet purchases are taxed based on where the customers reside, businesses both large and small that market and sell on the Internet are concerned about such issues as the enormous complexity of different tax laws under 30,000 or so sometimes overlapping jurisdictions. Small Internet businesses and "Mom & Pop" sales sites would be particularly affected by schemes of taxation that would require them to track transactions, ascertain the appropriate jurisdiction for each transaction, sift through thousands of pages of mind-boggling tax codes, and make innumerable tax filings with the various authorities. …

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