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Leave the Net Alone

Advocates of a continued ban on Internet sales taxes are at least as vocal. They include most of the presidential candidates (see "Where the Candidates Stand") as well as Virginia's Republican Governor Jim Gilmore, who heads the electronic commerce advirory committee. Some opponents of Internet taxes favor maintaining the status quo for a few more years; others want a permanent ban.

Those urging a complete and permanent ban argue that government regulation will stunt e-commerce growth and hamper the innovations that caused it to blossom. Governor Gilmore argues that state and local governments suffer no significant revenue loss as a result of online sales. According to a spokesperson, Gilmore also believes that e-commerce bolsters other areas of the economy, enlarging state and local governments' take from such existing revenue sources as income and property taxes and even stimulating local economies so that offline sales tax revenues increase. And Gilmore expects such trade-offs to continue, offsetting future sales tax losses. Economist Shane Greenstein of Northwestern University's Kellogg Business School, however, considers Gilmore's view shortsighted. Tax-free online sales will eventually cut into state revenues, he says. Recent research by fellow economist Austan Goolsbee of the University of Chicago supports Greenstein's view.

Leave the Net Alone--For Now

Economists Greenstein, Auerbach, and Goolsbee agree that a permanent ban is not the answer, and given the revenue potential from Internet transactions, it is politically unlikely. They suggest maintaining the status quo for a few more years.

Hindering Internet growth would hurt the overall economy, which benefits from tech businesses. Online sales figures may seem big, but they represent less than 1 percent of all retail sales and probably won't grow much beyond 2 percent before 2004, Goolsbee says. Imposing Internet sales taxes now, before cybershopping has become widely established, could cause online sales to drop by as much as 24 percent, according to a study Goolsbee conducted.

Also, the bulk of online and offline buying--services ranging from financial transactions to dry cleaning--is already exempt from sales tax. Auerbach and Goolsbee also note that the strongest U.S. economic growth is occurring in the service sector. Taxing services will require a major overhaul of the tax system. That's not on the table--yet.

Maintaining the status quo may give policy makers a chance to examine the issue and various proposals in depth. One plan--supported by many members of the tech community--suggests creating a simplified sales tax system, likely with a single nationwide rate. That solution would streamline the collection task for business, which currently have to deal with 7000-plus tax rates in different regions. Another proposal, supported by Governor Leavitt and the National Governor's Association, would create a set of databases like those used in processing credit card orders, so all businesses could easily calculate the appropriate sales taxes for any order. Regional governments have plenty of incentive to build such databases. But either plan would take time to implement.

Net Result

The problem isn't simple, and it will only grow more complex as the economy becomes increasingly global. The e-commerce committee is deeply divided over specific proposals and will probably recommend a simple three- to five-year extension of the current moratorium--which means the issue will be left for Congress to resolve or to defer further. The candidate we vote into the White House this year will also significantly influence the course of Internet taxation. We can stall for only so long: As online sales grow, states will demand their fair share. Now is a pivotal time, before we reach a crisis. Consumers probably have one or two more "free" Net shopping seasons left. But as the saying goes, there are only two things in life we can count on: death and taxes (even online).