Editorial: E-taxes -- Time to let states collect them

When the Internet Tax Freedom Act was passed in 1998, it made limited sense; e-commerce was just beginning to take off, and protecting it temporarily from state and local taxation seemed prudent and not very consequential. But since 1998, e-commerce has grown exponentially, becoming in a short time a robust and important part of the American economy. It's time to begin, in an orderly way, subjecting this new method of commerce to the same tax requirements imposed on the traditional commerce it supplants. This is necessary to protect both the principle of tax fairness and the revenue needed to fund essential government services.

The Internet Tax Freedom Act imposed a three-year moratorium on new state and local Internet taxes -- either sales taxes on the fees charged by Internet service providers or special sales taxes on purchases made online.

Continuing the moratorium on taxes applied to Internet access fees makes little logical sense when state government taxes telephone service and cable television service. The Internet is well enough established now that its growth would not be retarded by taxing access fees.

The same is true of applying state sales taxes to Internet purchases. The moratorium does not mean all purchases made online are free of taxes. It means they are treated the same as catalog sales under terms of a 1992 Supreme Court decision: A state may require Internet merchants to collect taxes on sales to state residents, provided the seller has a "physical presence" in the state. Thus, Lands' End, in Wisconsin, must collect the Minnesota sales tax on taxable purchases by Minnesota residents -- whether made by mail, phone or Internet -- because its Inlet stores establish a physical presence in Minnesota. Mail-order or Internet merchants without such a presence are not required to collect Minnesota taxes.

Movement is afoot in conservative circles to permanently prohibit states from requiring any sales tax collection by "remote sellers," whether mail order or Internet. Some, such as Republican presidential candidate John McCain, argue that the Internet needs the tax freedom to continue growing. That argument flunks the common-sense test for anyone who pays the least attention to Wall Street, especially the NASDAQ.

Others see a federal prohibition on remote seller tax collections as a way to starve state and local governments and thus force them to downsize. Since sales taxes account for about 25 percent of current state and local tax revenues, that's a potent threat.

Much e-commerce substitutes for traditional Main Street commerce, and legislation prohibiting collection of all Internet sales taxes would encourage that further. Imagine a future furniture buyer: Visit a design studio in the Twin Cities to make your purchase and pay 6.5 percent in sales taxes. Purchase the same furniture by computer and avoid the tax. Can you guess how long it would take for cagey furniture merchants to provide complimentary computer access in their studios and thus help you save 6.5 percent?

One proposal before Congress would go so far as prohibiting states from collecting sales taxes on automobile purchases over the Internet, including in-state purchases. Visit the suburban showroom, make your choice, then use the dealer's computer to place the order: instant savings of 6.5 percent.

There are two issues of fairness here that argue for extending the existing sales tax to all mail-order and Internet sales, as the Supreme Court in 1992 said Congress could do:

  Many Main Street merchants suffer a continuing and significant disadvantage over mail-order and Internet merchants because they cannot offer the same tax saving.

•   Lower-income purchasers are less likely to make mail-order or Internet purchases; they therefore pay taxes on merchandise and services that are tax-free to others.

  Sales taxes on Internet access services and purchases, and on mail-order purchases, are not new taxes; they are merely applications of existing taxes to new marketing methods. As those methods grow in importance, state government must be allowed to require that e-merchants collect the same tax that Main Street businesses collect -- taxes that help fund roads, schools, law enforcement, courts and numerous other essential services.

  Requiring e-tax collection by e-merchants involves some technical difficulties. States would need to agree on, or Congress insist on, uniform sales-tax definitions, so that a belt would not be taxed as an "accessory" in one state but exempted as "clothing" in another. While states must be free to decide what they tax, the definitions must have a level of consistency that allows for efficient collection.

  An efficient e-tax collection system also would best be operated by private vendors, much as credit card systems operate, relieving retailers of the actual collection burden. The National Governors' Association already has committed to developing such a system.

  Internet and mail-order sales are a boon for consumers, a boost to the efficiency of retail trade and a powerful cylinder on the engine fueling the phenomenal American economy. How ironic it would be to make them an enemy of state and local governments, which continue to do the grunt work that provides the environment that makes economic progress possible. Starving those levels of government by cutting off their sales tax revenues makes no sense at all.

  © Copyright 2000 Star Tribune. All rights reserved.