Taxing Internet Purchases -- The Pros and Cons.

The explosion of electronic commerce has fueled an ongoing debate regarding its tax implications. While unique tax issues surround access to and use of the Internet itself, this article focuses specifically on the debate surrounding the imposition of sales and use taxes on tangible products purchased over the Internet.

For dot.com companies and traditional brick-and-mortar companies alike, the Internet has opened vast new markets to sell all types of tangible products. Such on-line sales have gone largely untaxed to this point. The reason behind this unintended "tax holiday" is largely the result of constitutional nexus limitations faced by states as well as the complexity of accurately administering sales and use tax laws of each state and locality. While this issue is not a new one - mail-order companies have been around for decades -- the rapid growth of "e-retailing" has brought the issues into national focus.

Internet sales should be subject to sales/use tax because:

In the face of a long-term shift to a service-driven economy, states cannot risk losing an important source of sales/use tax revenue from purchases of tangible products.

Imposing a sales tax on Internet transactions would level the economic playing field for local retail stores.

Imposition of use tax is no longer an excessive burden on the remote seller due to technological advances, which permit accurate calculation and collection of tax.

Allowing Internet sales to go untaxed shifts the relative burden of the tax to the poor and elderly.

Internet sales should not be subject to sales/use tax because:

States will not suffer nearly as greatly as they fear; indeed, current state budget surpluses outweigh any concerns regarding lost revenues.

The competitive advantage enjoyed by on-line retailers as compared to local retailers fails to exist.

The complexity of the sales/use tax systems in virtually every state creates an overwhelming compliance burden on remote sellers that no software can possibly solve.

Any tax on Internet activity, including sales/use tax on purchases over the Internet, will threaten the technological growth of the U.S. economy.

Current constitutional nexus standards will be violated if remote sellers are forced to collect and remit sales and use tax.