E-Commerce and Taxes

While internet commerce has been the darling of Wall Street, and of millions of consumers, there are some glum faces looking on. None are glummer than those of state and local sales tax collectors.

The shift to electronic marketing of goods and services, though still in its infancy, is shaking the fiscal foundations of federalism. Already, the yearly sales generated by a single large Internet merchant, such as Dell Computer Corp., represent millions of dollars per state in potential tax revenues.

"Potential" for a number of reasons. First, though such sales taxes may be owed under existing law, they're virtually impossible to collect. Second, Congress last fall passed the Internet Tax Freedom Act that puts a three-year moratorium on the taxation of e-commerce. Third, a major political fight looms ahead over if, and how, to tax electronic sales when the three years are up.

Those questions are supposed to be answered by an advisory panel set up by last fall's act. It has 18 months to come up with a recommendation for a national policy on Internet taxation. Already, however, the panel itself has drawn criticism. State governments are unhappy that its 16 members include 9 representatives of business, many of them high-tech powerhouses. The US Conference of Mayors and National Association of Counties have taken the issue to court, charging that the panel is illegally weighted toward the communications industry.

Not all businesses want to see e-commerce get a tax-free ride. Many retailers see this as unfair competition. Burgeoning electronic purchases raise the gloomy prospect of failing local shops - and of potential property tax losses on top of sales-tax declines.

To some degree, such concerns are a reprise of the worries that sprouted around expanding catalog and mail-order commerce more than a decade ago. Those realms remain largely (though not wholly) unencumbered by sales taxes. But projections for Internet commerce - over $350 billion-worth by 2002, by one estimate - put this challenge to the established order in a category by itself.

There's undoubted good in nurturing the new commerce by holding off stifling regulation. But society's long-term good demands that this form of business do its share to support governmental services. Even Internet commerce, after all, ultimately requires roads, education, police protection, and other elements of civic infrastructure.

Also required: a level playing field for all types of commerce that compete for consumers' attention and dollars. Those consumers can vote with their fingers or feet to pick favorite purveyors. But government itself should not play favorites.