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E-Commerce and Internet Taxation

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E-Commerce and Internet Taxation

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When Tim Berners-Lee and Vice President Al Gore (right!) dreamed up the Internet, little did they envision the explosion of Internet commerce and dotcom mania. To prove the point, the Commerce Department reported in the fourth quarter of 1999 that consumers spent more than $5.3 billion in online sales and this accounted for 0.64 percent of the total retail sales for that quarter [1]. Add to this figure the exploding growth of business-to-business e-commerce and you have a pretty heady mix of economic prosperity and entrepreneurial activity. A report released by Stamford, Connecticut-based Gartner Group, stated that business-to-business e-commerce is not only changing traditional business models, but predicts that "B2B" e-commerce will exceed $7 trillion by 2004. [2]

Internet commerce has touched all aspects of business -- technology infrastructure, business-to-business commerce, business-to-consumer commerce, business portals, new business models, the growth (and decline) of tech stocks, new marketing and advertising strategies, and interesting strategic alliances and partnerships. Look for the arrival of new models, new strategies, and new relationships not even under consideration at present.

The economic furnace generated by Internet sales has, not surprisingly, caught the attention of business executives as well as local, state, and federal political leaders. The most pressing question, as one might assume with politicians, is, "Should the Internet be taxed?" Existing tax laws were not developed to face the significant changes that continue to take place with the emergence of the Internet or "New" economy. The Internet allows anyone with Net access to make purchases from anywhere in the world. How do you tax goods purchased online from consumers who do not reside in the state or country where the vendor has set up shop? Existing laws governing state and local taxation are being challenged in ways no one anticipated. If the answer is, "Yes -- Internet sales should be taxed," then how do you develop a system that will make it easy, painless, and fair to all groups involved? How can you police compliance, while continuing to support the growth of the Net? One thing is certain: This will not be eas y.

Forrester Research recently reported that online sales will grow to more than $184 billion by 2004. Potential tax revenues from Internet commerce are huge. We are talking about billions and billions of dollars. And it should come as no surprise that state governments want to tap into this new source of revenue to pay for schools, roads, and critical infrastructure. Taxation of anything is a constant political hot potato, and taxation of Internet commerce has proved no exception. Likewise, it should come as no surprise that an important group of politicians (both at the federal and state levels) and cyber- and technology business leaders oppose taxation of the Internet.

To tax or not to tax-- that is the $64 question. To address this question, Congress passed the Internet Tax Freedom Act and established the Advisory Commission on Economic Commerce to study the different positions and to offer recommendations to Congress on how to proceed. The Commission was scheduled to report its findings to Congress in April 2000. Although the Commission did report, it could not achieve enough of a consensus to make recommendations. This article will examine the pro- and anti-tax positions, the key players and organizations that support or reject Internet taxation, and the findings of the Advisory Committee on Economic Commerce. I think it is safe to say that the issue of Internet taxation will generate a great deal of passion and interest, and that any solution or recommendation will not make anyone really happy or satisfied.

The Pro-Tax/E-Fariness Position

State and local governments as well as a coalition of brick-and-mortar and Main Street business groups support the pro-tax/e-fairness position. …

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