The Internet, sales taxes don't mix

July 24, 2000|By Richard Scott Draughon

JACKSONVILLE, Fla. -- One of the surest ways to stop the economic growth this country has enjoyed in recent years is to tax business on the Internet. And those who want to levy this tax can be found in two very different camps.

The most surprising group calling for taxation is the Silicon Valley "big boys." They want to keep the upstarts from cutting into their piece of the Internet pie.

That would explain why Jeff Bezos, head of Amazon.com, would call for changes in the law eliminating business method patent protection after winning a major victory enforcing one of his company's many business method patents. Similarly, Andy Grove of Intel and other Silicon Valley executives suggest that Internet taxation is desirable. These companies and other large technology players don't need legal protection and can handle the complexity of government tax schemes and regulations, especially if the result is to keep the little guy off the field of competition.

The more obvious groups calling for taxation are state and local governments, as Maryland Comptroller William Donald Schaefer did recently when he argued that leaving Web sales untaxed renders "Maryland businesses and the thousands of people they employ at a competitive disadvantage." He also advocates expanding the powers of his office and participating in a national sales tax cartel to tax Internet transactions in the name of "fairness." He further suggests that Maryland will lose $148.5 million by 2003 if Internet sales are not taxed.

Internet taxation is indefensible. As an initial proposition, tax-free sales on the Internet are not draining away sales tax revenue from Maryland or any other state. State sales tax revenues in Maryland grew by more than 6.4 percent between 1998 and 1999, when there was more Internet buying than ever before. This statistic is consistent with a study released by Ernst & Young LLP showing that in 1998, state sales tax revenues across the nation grew an average 5.6 percent.

Even if Maryland does lose $148 million in sales taxes because of Internet buying during the next four years, such losses account for less than 1 percent of projected receipts. In addition, the dynamic effect of taxing Web sales will undoubtedly mean fewer sales and less tax revenue. Tax revenue arguments fail to recognize that taxing the technology industry in Maryland or any other state will result in lower levels of buying and economic activity, thereby reducing (rather than increasing) tax revenue.

The argument concerning tax fairness is also unfounded. Under current state tax law, only sellers with a business presence in a state are obliged to collect state sales taxes. But those calling for taxes believe that sellers with no nexus to a particular state should collect and pay state taxes, even though they receive no services from the state government.

Taxes are not an entitlement of the state; they are for services. The Internet vendor does not receive such services and, therefore, should be exempt from any related taxes.

A plan sponsored by the National Governors' Association requires e-commerce vendors to collect and remit sales taxes for the states and localities of every customer, no matter how remotely located. The plan empowers independent "trusted third parties" to calculate and collect taxes one-commerce transactions.

States are encouraged to "voluntarily" join the system and support a national taxation scheme featuring uniform product classifications and harmonized tax policies through multi-state compacts.

Allowing state governments to collect taxes beyond their jurisdictional boundaries using third-party agents is unconstitutional and violates constitutional prohibitions on economic barriers erected by states against each other.

The commerce clause reserves for Congress the right "to regulate commerce among the several states." The shipping and trading restrictions of Article I also make it abundantly clear that the founding fathers intended to restrict the authority of states in regulating commerce crossing state lines.

State and local governments are experiencing tax surpluses because of the enormous economic growth being created by electronic commerce. Applying Depression-era sales tax schemes to the Internet threatens this growth and misses a historic opportunity to rethink public policies for funding government. Taxing Internet transactions is unwise and unnecessary.

Richard Scott Draughon is the founder and chief executive counsel for Draughon Professional Association, one of the largest technology law firms in Florida.

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