State must levy tax on Web sales

June 30, 2000|By William Donald Schaefer

IT'S DIFFICULT to talk about tax issues at a time when the economy is doing well and the state is enjoying a surplus.

But if we don't deal with the tax implications of Internet sales today, we'll have to deal with the adverse consequences tomorrow. That's why I'm working with my counterparts in other states to find a fair and workable solution to this problem.

This is the problem: If you order something over the Internet, you aren't charged Maryland sales tax unless the company has a location or other business presence in Maryland, even if what you're buying would be taxable if you bought it at your local mall.

If nothing is done, we estimate that by 2003 Maryland will lose $148.5 million in sales tax revenue to these untaxed Internet sales. To put it in perspective, $148.5 million would pay for 21 new elementary schools or five new high schools. That's a lot of money. And our tax losses will only grow as e-commerce expands.

These untaxed sales put Maryland businesses and the thousands of people they employ at a competitive disadvantage. And people who can't afford computers and Internet access will be paying the tax that those who are better off can avoid. That's just not fair.

I'm not alone in this view. Andrew Grove, the chairman of Intel and one of the most visionary business leaders in America, shocked many when he told a congressional committee that not taxing Internet sales would lead to national economic disparities.

The Federal Advisory Commission on Electronic Commerce failed to recommend a level playing field to Congress for the taxation of Internet sales, leaving it up to the states to act. That's why I strongly supported state legislation authorizing my office to develop a voluntary, multistate, streamlined sales tax collection and administration system.

We're meeting with representatives of other interested states in a group sponsored by the National Governors' Association, National Conference of State Legislatures, Federation of Tax Administrators and Multistate Tax Commission to launch a pilot program that would be voluntary for states and Internet retailers.

At the heart of the streamlined sales tax project would be a "zero burden" collection system developed by state contractors. It's called "zero burden" because Internet retailers wouldn't have to register with a variety of states, file returns or interpret the law.

The contractors would electronically collect the tax and remit it to the proper states as part of each transaction, using technology to remove the burden from consumers and businesses. As Mr. Grove said, the technical challenge of collecting these taxes from different jurisdictions is "not insurmountable."

The sales tax generated $2.4 billion for Maryland in 1999, making it our second largest source of general fund revenue. It's a source of revenue unique to state and local governments, and the erosion of this tax base has serious ramifications.

We don't propose taxing any sales on the Internet that aren't already taxed when they take place at your local mall or corner store. A simplified sales tax system would be the first step in dealing with the growing impact of e-commerce and ensuring a level playing field for Maryland business and equity for Maryland taxpayers.

William Donald Schaefer is the comptroller of Maryland.

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