E-tax impasse goes back to Congress

Solution: States should get to decide for themselves whether to tax online commerce.

April 04, 2000

CONGRESS has to resolve the knotty policy problem of taxing Internet commerce, following the failure of the Advisory Commission on Electronic Commerce to muster the necessary votes to make any official recommendations.

But don't hold your breath waiting for action. Congress is unlikely to try to untie this mess in an election year.

When Congress does act, though, its position should be clear: It should be up to the states to decide if they want merchants to collect sales taxes on Internet commerce. That's the most rational way to handle this issue.

Ignoring the issue of how to levy state and local sales taxes on Internet commerce is only likely to harden the positions on either side of this debate. Consumers and businesses will expand their online purchases; state and local governments will continue to watch the potential tax revenue from those purchases pass them by.

For some governors, that's desperately needed money. For others, it's an added tax burden they don't favor.

You find that dichotomy on the commission itself. The commission's chairman, Gov. James S. Gilmore III of Virginia -- who won his election on a strong anti-tax platform -- believes that cyberspace should be a tax-free zone. Fellow Republican Gov. Michael O. Leavitt, a Utah conservative, believe states should have the right to require companies selling to their residents to collect his state's sales tax.

Opponents of taxing Internet transactions claim that states have no right to export their tax collection efforts to out-state-businesses. But many businesses remit out-of-state sales taxes already. Car dealers do it every day for non-resident customers.

The point is that it's a state issue, to be decided individually. The Supreme Court has ruled that it would be entirely fair for a state to require out-of-state merchants to collect sales taxes, as long as Congress creates the ground rules.

By ignoring this issue and continuing to keep Internet transactions tax-free, Congress is already making policy. A more responsible approach would be to design a fair and equitable scheme that allows states the choice to tax sales whether they are made over the counter or over the Internet.

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