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104 IRET Congressional Advisory 1 (2000)

handle is hein.taxfoundation/iretcgadv0101 and id is 1 raw text is: May 15, 2000 No. 104 TAX REFORM TO HANDLE THE E-TAX CONTROVERSY The House of Representatives has passed a bill to provide a five year extension of the current ban on new Internet taxation and to eliminate Internet access taxes in the 10 states that currently have them. The bill is good policy and should be adopted by the Senate. Some states have raised a separate issue concerning the difficulty of collecting use taxes from their residents on their out-of-state purchases over the Internet or from catalogue The House of companies. The states would passed a bill . like to force out-of-state extension of vendors to collect these taxes for them. The issue is not onw an settled in the House bill, nor good policy an should the Senate try for a by the Senate. quick fix on the question. The best solution to the sales and use tax issue would be to scrap income and sales taxes in favor of a consumed income tax at the federal and state levels. What Is Covered. The moratorium extension enjoins states from imposing excise taxes on access to the Internet through 2006 and eliminates such taxes in the ten states that already impose them. It also prohibits states from imposing Reprd proi 'he ci axati(, d sho higher taxes on goods purchased on the Internet than they charge on goods purchased in-state. It is perfectly reasonable for the federal government to outlaw state taxes on access to and use of the Internet, which is a national (indeed, international) network, and to forbid differential taxation of out-of-state purchases (for example, a 5% sales tax on in-state purchases, and a 7% use tax on out-of-state purchases) that would be a barrier to interstate commerce. Such a ban should be made permanent, and should eliminate any existing access taxes grandfathered by the current moratorium. What Is Not Covered. The moratorium does not prohibit states from enacting and trying to collect sales taxes (called use taxes) on out-of-state Internet purchases by their residents as long as the rates are the same as on in-state brick and mortar purchases and in-state Internet purchases. There is no reason for the federal government to ban non-discriminatory state use taxes on out-of- state purchases of goods over the Internet, and the proposed moratorium would not do so. State representa- ,sentatves has tions to the contrary are ide afive year wrong. irrent ban on Neither, however, does n... The bill isd the bill assist the states in uld be adopted collecting their use taxes on out-of-state purchases, and that is what the states would like to change. It is not clear, however, that national enforcement of sales and use taxes is the best solution to the problem. The Sales Tax Leads To Trouble. All but four states impose a sales tax, as do many smaller jurisdictions (totaling over 30,000 entities). Bus- inesses bear the cost of collecting the taxes for the jurisdictions in which they operate. The types of goods covered and the tax rates vary widely from Institute for Research on the Economics of Taxation IRET is a non-profit, tax exempt 501(c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote economic growth and efficient operation of the free market economy. 1730 K Street, N., Suite 910, Washington, D.C. 20006 Voice 202-463-1400 * Fax 202-463-6199 0 Internet www. ret.org

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