Is Tax-Free Shopping Doomed?

I ran up plenty of bills shopping online this holiday season; being spared the sales tax was a blessing. That said, I don't want to lose speedy response times from my local fire and police departments, reasonably prompt repaving of my local roads (this century, please), and other community services.

Unrelated issues? No. Increased online spending by consumers has left state and local governments fearing that a significant drop in a major source of revenue--local sales taxes--will prevent them from providing the services we all expect. And many government agencies are clamoring to end the ban on interstate Internet sales taxes that we've enjoyed for the past few years.

Taxing the Net will literally take an act of Congress. A 1992 U.S. Supreme Court ruling held that states can't tax out-of-state purchases. The 1998 Internet Taxation Freedom Act put a three-year moratorium on Internet access taxes (but not sales taxes). And it created an advisory committee to study electronic commerce and recommend action on various issues, including online sales taxes; this committee is scheduled to give its final report on April 21.

A Piece of the Internet Pie

Web surfers in the United States spent about $20 billion on cyberpurchases last year, according to Forrester Research; it's more than double the figure for 1998. Projections vary, but nobody doubts that online spending will continue to grow--and state and local governments want a piece of the fiscal action.

Some states aren't waiting for Congress to act. Michigan and North Carolina residents will get a surprise on their 1999 state income tax forms: a line asking them to calculate what they spent online and then to pay local sales tax on that amount. Florida and other states are mulling similar action.

These states are merely enforcing existing use laws that let them recoup sales tax revenue lost to out-of-state purchases. Most states have such laws; the new twist is charging consumers directly. Usually, businesses pay the fee because the states consider collecting from buyers too much trouble. Cybersales, however, are a tempting enough target to prompt some states to change their approach.

Have you kept all your online receipts? Probably not (or you might have deleted them accidentally). That's one reason this approach won't work very well and why ultimately Congress may have to intervene to get money to the states.