|TAXING INTERNET SALES|
|Should sales over the Internet be taxed like purchases in retail stores? James Gilmore, governor of Virginia, and Mark A. Murray, state treasurer of Michigan, respond to your questions.|
Nickerson of Washington, D.C., asks:
If the Internet is the engine behind this overdrive economy, and online purchases spur growth through offline purchases necessary to expand the ubiquitousness of the Internet, what will happen if Internet sales are taxed? Will Internet use go down and thus a marketwide reduction in all areas of commerce, on- and off-line?
A. Murray responds:
Treating Internet sales equally to those sales made by traditional brick-and-mortar retailers should not affect the growth of Internet sales. The reasons for the growth of the Internet are because of the technological and business advantages, not because of tax concerns.
Taxing Internet transactions would kill the goose laying the golden egg. The Internet truly has become the engine of America's economy. The main reason for this is that the growth in electronic commerce is not the sole province of large corporate ventures. The Internet for the first time ever empowers "mom and pop" small businesses with the opportunity to reach a global market and compete nationally and internationally with the big capital intensive conglomerates. With small businesses making up the bulk of economic activity in this country, this has had a profound effect on our economic growth. Additionally, the growth of electronic commerce is not restricted to just sales of goods and services over the Internet. The tremendous growth of electronic commerce has also driven substantial investments in the infrastructure that makes electronic communications possible. These supporting broadcast technologies represent multi-billion dollar industries in their own right.
At the same time, individual consumers have been empowered as never
before to shop, trade and obtain nearly perfect information about and
access to goods and services and prices. The Internet has begun to create
a perfect free-market economy -- an economy at which even Adam Smith
would marvel. We clearly want to encourage this development in every
way we can.
More importantly, the cost of compliance for small businesses would be prohibitively expensive. One study by Ernst and Young estimated that it would cost small businesses selling goods to consumers in all states as much as 87 cents for each dollar collected in sales taxes just in compliance costs! Another estimate by a tax expert from Hewlett Packard approximated that it would cost each small business in America at least $100,000 to hook up to a third-party tax collection agent and interface the third-party tax collector's software with the business's own software, a method of simplification proposed by the National Governors Association.
Even more pernicious is the potential for these new tax burdens to suppress a market that many sectors of our society desperately need to access by making it prohibitively expensive. One of the reasons many disenfranchised groups in this country are not fully utilizing electronic commerce is the sheer cost. But hardware prices are rapidly decreasing and personal computers will soon be as ubiquitous as the telephone or television. One national company advertises a personal computer delivered to your home and Internet access service for only $25 per month. Regressive sales taxes and access taxes on the Internet, however, would place heavy marginal costs on those that can least afford it, and deny poor Americans the freedom to enter the global marketplace.
We cannot continue to implement zero sum economic policies that examine market segments in a vacuum. The Internet has so dramatically spurred economic growth precisely because of the many links it creates with other industries, even off-line, and the market efficiencies it facilitates. Almost 80 percent of online commerce is conducted between businesses. In the consumer world, the Internet has created an informed consumer, one that in many cases gathers information online but purchases from their local merchants for all the tactile benefits of examining a product in person and receiving personal service.