March 23, 2000
By Adam D. Thierer
Some commission members had embraced a scheme first proposed by
the National Governors' Association (NGA) that would allow state
and local governments to impose taxes on Internet vendors with no
physical presence in the taxing jurisdiction. To collect these
taxes, the governors' plan envisions computerized tax-software
systems, private-sector tax collectors called "Trusted Third
Parties," "geo-code" tracking systems for individual consumers, and
multi-state taxing bodies to administer what would be the
equivalent of national sales tax.
If this sounds needlessly complex and frighteningly intrusive,
it is. In fact, it would represent the very sort of "taxation
without representation" our nation's founders believed unjust
enough to warrant a revolution. It could also cripple America's
"Information Age" economy by stifling the Internet entrepreneurs
who are fueling record levels of economic growth.
Why would any public official endorse a tax system of dubious
constitutionality that poses such a clear and present danger to the
current economic expansion? Simple: for the money. State and local
officials are flocking to an NGA-style plan to pump even more tax
dollars into their already overstuffed coffers.
"Money is just pouring in over the transom," says California
Gov. Gray Davis. But rather than return record tax surpluses to the
people, many governors and mayors are arguing that they need still
more revenue to continue providing vital public services. Dallas
Mayor Ron Kirk, for example, has joked that citizens who enjoy the
tax-free "virtual" world of the Internet should not be surprised if
they dial 911 and find that a "virtual" firefighter or cop shows up
at their house.
To be fair, e-commerce eventually could erode the sales-tax
revenue that cities and states have traditionally relied on. But a
failure to raise enough revenue from the bricks-and-mortar
merchants based in their jurisdictions is no reason to let mayors
and governors slap sales taxes on Internet companies based
The NGA proposal is, in short, a shakedown. The governors want
to grab revenue from Internet companies located hundreds or even
thousands of miles away, much as police in certain communities set
speed traps to raise ticket revenue from out-of-town motorists.
Never mind that the companies being taxed would enjoy no democratic
representation in the jurisdiction doing the taxing. Who can be
bothered with such old-fashioned concerns when money's at
As a practical matter, collecting e-taxes would be a logistical
nightmare. Internet merchants resemble mail-order and catalog
companies, which send merchandise across the country but are taxed
only in the jurisdiction where they reside. There's a good reason
for this: The United States contains more than 6,000 taxing
jurisdictions. It's folly to argue that a catalog company or
Internet merchant should be required to pay taxes to every one of
Then there's the legal hurdle. The Supreme Court has restricted
state and local efforts to levy taxes on firms without a physical
presence in the community. Taxes on Internet sales could be ruled
unconstitutional as well.
Not that the Internet should remain completely tax-free,
although that is my preference. The solution is to let mayors and
governors impose taxes on those Internet companies located within
their jurisdictions, just as they are now permitted to do with
mail-order and catalog companies. Internet vendors would be taxed
on an equal footing with bricks-and-mortar merchants - at the
"origin of sale." So, if you purchased a book from Amazon.com,
whose principle place of business is Seattle, the sales-tax rate
for the city of Seattle and the state of Washington would apply,
just as if you walked into a traditional store in Seattle and
purchased a book while visiting the city.
Internet users who fear burdensome taxes under an origin-based
system need not fear. Such a system would provide a check on
excessive taxation by encouraging vigorous interstate tax
competition, since companies could "shop around" for more
hospitable tax locales if their current jurisdictions became
over-zealous tax collectors.
And that, more than anything else, explains why pro-tax members
of the Advisory Commission on Electronic Commerce opposed an
origin-based system - and why advocates of the free market ought to
Adam D. Thierer is a former Walker Fellow in Economic Policy at
The Heritage Foundation, a Washington-based public policy research
E-Commerce: A Taxing Issue
Adam D. Thierer
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