Tax-Free Online Shopping Should Not Become the Ghost of Christmas Past
Unrestricted Internet taxation would be an unfair extension of state's powers

This holiday season, more consumers than ever will shop online, a reality that has prompted many state and local officials to call for broad new taxing authority. But according to a study released today by the Cato Institute, untaxed e-commerce is neither emptying state coffers nor destroying local businesses. In "Tax Bytes: A Primer on the Taxation of Electronic Commerce," trade policy analyst Aaron Lukas argues that as the birthplace of the Internet, the United States has a special role to play in ensuring that revenue-hungry state and national governments do not unjustly kill the goose that may lay the golden egg. "As Supreme Court Chief Justice John Marshall observed, the power to tax is indeed the power to destroy," he writes.

Lukas finds that sound tax policy should continue, making sure that "states and foreign governments do not unfairly export their tax collection burdens, thereby impeding online commerce." He examines the recent history of both domestic and international e-commerce taxation. Among his findings:

• States do not need the additional revenue. The best estimates show that states "lost" about $170 million in 1998, less than one-tenth of 1 percent of total sales tax revenues. Most states are in fact running large budget surpluses right now.
  
  
• Allowing states, or foreign countries, to draft remote sellers as tax collectors violates established principles of due process and sovereignty and undermines beneficial tax competition among governments.
  
  
• E-commerce does not represent a serious threat to most traditional retailers. "Only 10 percent of American households have ever made an online purchase. And of that group, only 4 percent make more than 10 purchases a year."
  
  
• U.S. policymakers should remain alert to the privacy implications of any proposed changes to the international tax regime, as well as attempts by foreign governments to block the implementation of new technologies, like electronic cash, rather than deal with their evolving tax consequences.

Lukas reviews specific alternatives to traditional tax structures that would resolve the current problems raised by remote electronic commerce, but he concludes that the best answer lies in more responsible fiscal policy by both state and international governments. "The best course of action is for governments to embrace lower spending, if not in absolute terms, then as a decreasing share of the overall economic pie." Domestically, Lukas advocates the congressional establishment of a uniform national jurisdictional standard under which states may only tax companies that have a "substantial physical presence" in the state. Internationally, the United States should continue to stand up for important principles such as tax competition and aggressively pursue an Internet free-trade agreement in the WTO.

"Tax Bytes: A Primer on the Taxation of Electronic Commerce"