DO WE NEED A TAX FREE INTERNET ?
BY JULIANNE MALVEAUX
People who buy on the Internet enjoy significant advantages over those
who shop the old-fashioned way, but picking their duffs up from their couch
and meandering to the mall. Internet shoppers don’t have to park or fight
crowds. They are less likely than their mall-shopping friends to make
impulse purchases. And, most importantly, they don’t pay sales tax, saving
them as much as 9 percent on the value of their purchases. Congress put a
moratorium on Internet taxation in 1998 in an attempt to support the
then-fledgling form of shopping. Now, thanks to the initiative of California
Republican Christopher Cox, the moratorium may be extended for as many as
five years.
At least forty of the nation’s governors say they aren’t having it. They’re
sending letters out to every Senator and member of Congress asking them not
to extend the moratorium on Internet taxation. They say they want to have a
level playing field between the Internet and retail businesses, and that they
need the revenue that they are missing from Internet sales. They have a
point. Internet sales were estimated at $5.3 billion in 2000, and may be as
high as $13 billion by 2004. If the average state sales tax is 6 percent,
then states lost $318 million in revenue in 2000. Assuming the same tax rate
in 2004, they’d lose about $780 million in revenue.
To be sure, Internet sales are a small fraction of total retail sales – they
still haven’t exceeded the one percent mark. But even a fraction of a
percent of sales means billions of dollars, as current data about the weak
increase in July retail sales indicates. Last month, retail sales rose a
scant 0.2 percent, a number that is low, but higher than analysts predicted.
Companies like Wal-Mart and Home Depot saw double-digit sales increases, but
high-end retailers have been experiencing such weak sales that they are
deeply discounting merchandise with special sales. Those who slash recognize
that consumer dollars fuel the economy. Scrambling for sales may start at
the malls, but it extends to the Internet.
Why should ‘net sales get special treatment? Some say the technology is so
new and has such potential that it needs to be supported. But most people
who shop online do so because it’s convenient, not because they don’t have to
pay taxes on their purchases. I’m not sure how much of an incentive 6
percent provides, but I am certain that those who are on the wrong side of
the digital divide don’t even have the opportunity to sidestep taxes. Giving
Internet users a break on taxation is regressive, penalizing those who are
less likely to use the ‘net. For that reason alone, Internet sales don’t
warrant special treatment – they should be taxed like other sales.
Those who oppose Internet taxation say imposing ‘net taxes isn’t easy,
because it is not clear which jurisdictions shoppers should pay taxes to.
There are more than 7000 taxing jurisdictions – cities, counties, and states
– after all. If a California resident shops from her laptop in Illinois to
purchase goods that are shipped from Florida, which jurisdiction collects a
sales tax? Some say the five-year moratorium will allow states to develop a
protocol that will make it easier to collect taxes. But the process for
developing such a protocol promises to be a lengthy one, and the longer it
takes, the more dollars states miss out on. There ought to be a compromise,
some interim solution that allows states to collect at least some of the
sales taxes they’d get if Internet shoppers were spending their dollars at
the stores.
Many states understand how critical spending is to the economy that they
periodically declare tax holidays, especially as youngsters head back to
school. New York and Maryland are two of the states that have August tax
moratoriums, hoping to stimulate spending by offering a few dollars in
savings. Internet sales may eventually be as important as other retail sales
in stimulating the economy. As a compromise, perhaps ‘net retailers could
impose a uniform tax of 4 percent on Internet sales and remit them to the
state where the product is shipped.
I doubt that Internet sales will drop if taxes are imposed on them. I don’t
think we need a tax-free Internet. But we do need a level playing field on
taxation, and we need legislators who are more committed to solutions than to
procrastination. Instead of a moratorium, how about an experiment that taxes
‘net sales at a uniform rate.