TO TAX OR NOT TO TAX: Tax Freedom or Free Ride?

By Yang, James G. S.; Poon, Wing W. | Strategic Finance, August 2001 | Go to article overview
Save to active project

TO TAX OR NOT TO TAX: Tax Freedom or Free Ride?


Yang, James G. S., Poon, Wing W., Strategic Finance


By some accounts, the volume of Internet commerce is expected to reach $327 billion in the next five years. Due to the sudden explosion of e-commerce, debates are raging as to whether and how Internet commerce should be taxed.

The stakes could be enormous. A report to Congress by the Advisory Commission on Electronic Commerce says that if Internet commerce is exempt from sales tax, state and local governments could lose $3.5 billion dollars by 2003. Other estimates predict $8 billion a year in lost revenue by 2004. Though this accounts for only 2% of total sales tax proceeds, The National Tax Journal reports it could reach 10% by 2007. As a result, some experts warn that state and local governments might be forced to reduce spending on social services and education and then raise property taxes to make up the loss.

The hard questions include not just whether e-commerce vendors should pay sales tax--but who should collect it? In principle, the old rule of "nexus" applies. If the seller has a store in the state where the buyer lives, the seller must collect sales tax. But if the seller has no store in the buyer's state, the buyer is responsible for paying sales tax--called a "use tax" in this situation--to their state and local governments.

TAX "FREE"

In 1992, the U.S. Supreme Court case Quill v. North Dakota limited the states' right to collect sales tax from mail order companies. The court ruled that as long as the seller doesn't reside in the same state as the buyer, the seller isn't required to collect sales tax.

The growth of the Internet and e-commerce intensified the debate. The Internet crosses state boundaries, so state and local governments have no jurisdiction. The seller is a computer server and easily moved. It may have no legal address, so its physical presence is elusive.

Meanwhile, the buyer's state government can t tax an out-of-state seller. Grover Norquist, president of Americans for Tax Reform and former economist with the U.S. Chamber of Commerce, notes that taxing out-of-state sellers amounts to taxation without representation. "You cannot allow Alabama politicians to impose taxes on businesses in Maine and New Hampshire because there is no limit to the abuses that can follow," he says. "They can go kick your door in and levy sales taxes on things you bought over the Internet."

Legally, Internet commerce is not tax free because buyers are supposed to pay the use tax. But it may as well be tax free for all practical purposes because few if any buyers actually pay it. David McClure, president and CEO of the U.S. Internet Industry Association, says states tried to resolve this dilemma by imposing taxes of their own, which often conflicted with each other.

In 1998, Congress tried to eliminate the contradictory taxes by enacting the Internet Tax Freedom Act. The law prohibits "taxes on Internet access... and multiple and discriminatory taxes on Internet commerce" until October 2001. The Act also formed an Advisory Commission on Electronic Commerce to make recommendations to Congress.

The 19-member panel voted last year to propose that Congress extend the moratorium on Internet taxation for five more years. Congress hasn't yet done that. So, while the Commission clarified some issues on e-commerce taxation, it didn't solve the problem.

The Commission also discussed a full complement of additional concerns:

Privacy

In order to comply with tax remittance, consumers may be asked to supply personal information, such as addresses and credit card numbers.

Double Taxation

Double taxation can occur in international transactions when a country imposes sales tax on the seller while the United States charges it to the buyer.

Multiple jurisdictions

There are 30,000 jurisdictions in the U.S. It's almost impossible to comply with so many different tax rates and laws.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
Loading One moment ...
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited article

TO TAX OR NOT TO TAX: Tax Freedom or Free Ride?
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

While we understand printed pages are helpful to our users, this limitation is necessary to help protect our publishers' copyrighted material and prevent its unlawful distribution. We are sorry for any inconvenience.
Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.

Are you sure you want to delete this highlight?