Congress has assigned an immensely important task to a special Advisory Commission on Electronic Commerce: to conduct a thorough study of issues involving taxation of sales transactions using the Internet and submit findings and recommendations to Congress by next April 21. The 19-member commission, chaired by Gov. James S. Gilmore III of Virginia, met two weeks ago in New York City and began exploring whether existing tax systems can be adapted to work in the electronic marketplace. It's an important question, and outlined below are some suggestions that may help Commission members stay focused on taxation and other key issues that need prompt and judicious attention as they proceed with their work.
The Internet is a marvelous, and growing, collection of computers linked together. As a medium for communications, the Internet and its various components should not be subject to any new taxes by any level of government.
Electronic commerce is huge, especially in its wholesale form. Each day, an estimated $3.2 trillion is transferred through the world's financial-exchange settlement systems. Other business-to-business transactions constitute much as 80 percent of electronic commerce, and many of these dealings are not subject to sales taxes. These areas of e-commerce need not concern the Commission.
The primary task for the Commission is to recommend a tax system that applies to the rapidly growing share of retail activity occurring in cyberspace -- the business-to-consumer electronic transactions.
Forrester Research estimate that 6 percent of all U.S. retail dollars -- or $184 billion -- could be spent online by 2004. Forrester projects that e-tailers will rake in $10-billion in Christmas season sales this year, up from $3.5 billion last year. An Ernst & Young report, released at the Commission's first meeting, estimates that state and local governments lost $170 million last year because business-to-consumer electronic transactions were not taxed.
State and local officials are concerned about these and future revenue losses. They should be. Just last month, Dell Computer, the world leader in web-based sales, announced that its online business now averages $30 million per day. Dell's chairman, Michael Dell, said his company, which now conducts about 43 percent of its sales on the Internet, will probably see that figure increase to between 60 and 70 percent "in the not-too-distant future."
The Commission should address the tax equity problem now before the disparity -- taxing physical transactions while exempting remote sales -- hopelessly distorts the marketplace. The Commission needs to focus on designing a tax system that achieves equity and does not burden electronic vendors or consumers. Equity and simplicity should be the Commission's commandments.
One-fourth of all stock trading is being done online. An estimated 39 percent of American adults have access to the Internet at home or at work. Internet traffic doubles every 100 days. Online shopping -- even if taxed exactly the same as physical transactions are -- will continue to grow if consumers feel it provides more choices, competitive prices, greater convenience and superior services. An impractical and imponderably stupid idea that the Commission should leave alone is the infamous "bit tax," first proposed in Europe in 1995. No one on this continent has seriously proposed messing with this.
Due to past Supreme Court rulings, states may not require a vendor to collect the state sales tax if that vendor does not have a physical presence, called nexus, in that state.
At present, out-of-state mail order companies need not collect any state sales taxes on remote sales. Because of this quirky loophole that benefits catalogue sales at the expense of Main Street and shopping mall retailers, state and local governments are now losing roughly $4 billion in sales tax revenues. Those losses are small potatoes compared to what will occur if retail e-commerce continues its phenomenal and tax-free growth.
The retail form of electronic commerce -- business to consumer transactions -- represents a tremendous opportunity to reshape-capitalism in the 21st century. The Commission only has the next seven months to craft recommendations to Congress on how to design an equitable tax structure for the new economy. It is a big job. We all must hope they will do it well.
Public policy consultant Tom Bonnett lives in Brooklyn, N.Y., and is the author of a recently published report, Governance in the Digital Age, commissioned by the seven national organizations serving state and local governments in the United States.
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