If It Ain't Broke, Why Is Everyone
Trying to Fix It? Taxing E-Commerce
in a Destination-Based World
Michael S. Greve
The political debate over the taxation of Internet commerce, both internationally and in the United States, seems strangely shrill. In the United States, state and local governments warn of an impending collapse of sales tax revenues, but the scale of retail e-commerce— a mere 1 percent of all retail sales—lends little credence to those complaints. 1 On the international scene, conflicts have arisen over the taxation of electronically supplied services to individual customers. The volume of such services is very low though, and is likely to remain so for some time. Even allowing for the prospect of rapid e-commerce growth (and attendant government revenue “losses”), it is fair to say that the decibel level exceeds the economic stakes. The debate owes its intensity to larger political and ideological considerations.
The Internet is a driving force behind the pervasive trend toward increased competition among governments. Electronic commerce enhances competition by making citizens and businesses more mobile, by reducing the costs of transborder transactions, and by “disintermediation” (that is, by eliminating middlemen who provide governments with easily regulated “chokepoints”). E-commerce has thus come to provide a focal point for the fundamental debate about the consequences of intensified government competition and the need—if any—to counter that trend through increased government cooperation and cartelization.
In the Internet tax debate, moreover, two issues overlap. The first of these is the general question of tax competition—or, as governments and intergovernmental entities prefer to say, “harmful tax practices.” The second controversy revolves around regulation of