Internet Sales Tax Issue Crosses State Lines

July 7, 2008 - 8:02 PM

( - As more and more consumers go online, the debate over whether or not to levy state sales taxes on the $8 billion spent annually over the Internet moved to San Francisco this week, where the congressionally appointed Advisory Commission on Electronic Commerce convened to grapple with what is shaping up to be a major issue in the 2000 elections. The meeting in San Francisco ended in a draw as the commission decided to postpone any recommendations until at least March.

"There is much debate left to be done," said commission chairman Governor Jim Gilmore of Virginia. His deadline for a full report to Congress is next April.

Each side of the 19-member commission is led by a Republican governor. Those in favor of a permanent ban on Internet sales taxes are led by Gilmore, who credits the lack of a sales tax as a factor in the exponential growth of e-commerce.

"E-commerce is a driving force of our economy and we shouldn't saddle it with new taxes," said Gilmore.

Utah Gov. Mike Leavitt heads those opposed to a ban on Internet sales taxes. He says the 45 states that have a sales tax are entitled to their share of Internet transactions just like any other retail sale, and the rapid growth in Internet commerce without taxation threatens those states' tax revenue base. He is leading those on the commission who favor applying existing state sales tax laws to Internet transactions.

"We're trying to teach people that we just want to collect taxes that are already on the books," said Leavitt.

Leavitt was referring to laws in states with sales taxes that require purchasers of interstate goods via telephone, mail order or the Internet to pay the sales tax of their home state. The retailer, in most cases, is not required to charge sales tax on goods shipped out of state. The onus lies with the consumer, who is expected to voluntarily send the sales tax to his state government. Some states, such as Michigan, Maine and Connecticut even include a "user tax" space on their tax forms.

Therefore, if someone buys furniture over the Internet from a firm in Alaska, where there is no sales tax, and has it shipped to their home in Los Angeles they are expected to pay the state of California its six- percent sales tax. Montana, Delaware and New Hampshire are the only other states without a sales tax. The District of Columbia levies a 5.75 percent sales tax on non-food items.

Opponents of interstate sales taxes say that Leavitt's argument is a moot point because virtually no one voluntarily pays user taxes.

"If you don't collect a tax for 20 years, is it still a tax?" asked Small Business Survival Committee president Chris Wysocki.

Wysocki told that collecting sales taxes on Internet goods will not only cut sales over the Internet, but would saddle retailers with mountains of paperwork as they try to comply with the more than 7,500 local, county and state sales tax regulations.

"It will dry up sales revenue," said Wysocki.

However, at least one economist says that as Internet commerce grows, states will lose badly needed sales tax revenue, which they may try to replace by raising income taxes or property taxes.

"At the state level, I rather favor the sales tax relative to the income tax," William Niskanen told "Exempting Internet sales erodes that whole sales tax base over time, and I think that's not a good idea."

National Taxpayers Union president John Berthoud disagrees that exempting Internet commerce from sales taxes will cut into state tax coffers.

"There is absolutely zero justification for more taxes on the Internet," Berthoud told

"Bill Clinton talks about the 'digital divide.' You put taxes on the Internet and a disproportionate burden will fall on lower income people who pay a higher percent of their income in sales taxes," said Berthoud.

The director of Project 21, a conservative African-American leadership network, told that he also believes that sales taxes are regressive and unfairly target the poor.

"People are looking for goods and services and they are able to get them over the Internet. Now the states are looking to come in and put on another surcharge," said David Almasi.

He added that the Internet has opened up new shopping opportunities for the "urban poor" who may find it difficult to get to suburban shopping malls.