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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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