A Taxing Situation

FRAMINGHAM (03/10/2000) - With a month to go until April 15, this seemed like a good time to talk about taxes. But it's not income tax that's on my mind - it's sales tax.

Lately, it seems not a day goes by without some political candidate, industry pundit or dot-com talking head urging federal and state legislators to refrain from imposing the "burden" of sales taxes on Internet commerce.

I've heard all the arguments - that there are 50,000 taxing districts in this country, that determining the location of the buyer is difficult, that collecting taxes would be expensive for Internet start-ups, etc. Some arguments have merit, but not one is sufficient to forego the collection of sales taxes, which our towns and cities rely on to support their infrastructures and maintain our schools, fire stations and libraries.

The federal government estimates that e-commerce totaled $5.3 billion in the fourth quarter of 1999. Not included in this figure are online travel services, financial brokers and dealers, and ticket sales agencies, which together make up the largest share of sales to consumers on the 'Net. Even without those services, and even using a conservative 5% as the sales tax rate, that's $265 million in lost sales tax revenue! Evenly divided, it's more than $5 million per state.

The major drawback to collecting sales taxes is the multitide of local tax districts in this country. In many states, sales taxes can vary by county, city or town. Some states (my own Texas included) allow special tax areas that don't follow standard political boundaries. This is definitely a barrier to properly collecting sales taxes, but it can be overcome.

There's a suggestion going around that the states could form a "sales tax clearing house" to collect and disburse the funds collected at a point of sale.

It's a good idea, but it needs to be coupled with a simplification of the sales tax areas in those states (such as Texas) that have multiple tax districts.

Either the states must take the lead in organizing this effort and capture some income through sales taxes, or they may as well close up shop. If the states don't do it, the federal government will step in with a value-added tax, returning only a small percentage to the states. The other alternative, equally bad, is to do away with sales taxes, and rely on income and property taxes to fund local government organizations.

Kearns, a former network administrator, is a freelance writer and consultant in Austin, Texas. He can be reached at wired@vquill.com.

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