Taxation and the Internet

Taxation and the Internet

With the rising popularity of online shopping, many state governments are growing more and more concerned with the lack of proper law governing taxation. A typical, traditional purchase requires payment of state sales tax at the point of sale but with online purchasing this location is nonexistent. Since buyers and sellers are located anywhere in the world is becoming increasingly harder to establish law requiring the payment of sales tax. Regardless, many states are implementing new laws to help curb tax revenue losses.

Massive benefits come from the collection of sales tax. While some states do not require it, others use its revenue as a primary source of income to pay state employees, build roads, and improve state education. With e-commerce profits climbing above $150 billion a year, massive revenue amounts could be collected and used to further fund state activities. Surprisingly, little has been done to collect on those numbers.

A complication exists when trying to establish how one pays sales tax. The obligation to pay tax is typically determined by the location of the buyer. Since buyers and sellers exist around the world, it is extremely difficult to formulate legislation requiring sales tax payment from state to state commerce let alone commerce from foreign nations.

Enforcement issues have also been a problem when trying to collect from interstate commerce purchases. While a purchaser is technically required to pay such taxes, enforcement of such laws has been very weak. Since numerous items can be purchased on a daily basis, it is extremely difficult to track and enforce the payment of sales tax. Current enforcement is limited to large ticket items such as boats, automobiles, etc. Unfortunately most items purchased online consist of items of small magnitude. Since enforcement is so specific, shoppers can evade the tax with extreme ease.

To further this evasion, businesses have additional leeway for avoiding tax collection. Businesses that do not have a physical location in a particular state are not required to collect sales tax for customers of that state. Some brick and mortar businesses go so far as to create separate Internet entities to avoid such tax. Such offenders include Barnes and Noble and Walmart.

The benefits shoppers enjoy result from the complication associated with the tax law. With so many regulations, legislators find it extremely difficult to merge tax law with other states and countries. The federal government has helped prolong the tax-free environment associated with ecommerce. In 1998, Congress passed the Internet Freedom Act, which "established a three-year moratorium on taxing Internet access services at the state or local level" (Tax on, online). In 2001, President Bush signed documentation to extend this act an additional two years. The federal government must see the inherent benefit of leaving the Internet tax-free.

Unfortunately not all government officials agree with the policies established by Congress. Out of fifty states, forty-five impose state sales and use tax. These states are seeing the consequences of zero Internet sales tax collection. "Nationwide, the National Governors Association projects state revenue