Sales Tax Would Hurt E-Commerce

Applying a sales tax to purchases made over the Internet would reduce the number of online buyers by 25 percent, and cut online spending by at least 30 percent, according to research conducted by a University of Chicago professor.

Assistant Professor of Economics Austan Goolsbee of the university’s Graduate School of Business said that the lack of sales tax is a good thing for e-commerce right now.

“I think right now a moratorium is a good idea,” Goolsbee said. “You want to let [Internet retail] grow and get started.”

The US and 132 other nations have agreed no to impose customs duties on electronic commerce, and have instituted a three-year moratorium on new Internet taxes.

Goolsbee said it is conceivable that this grace period can work for several years, but when e-commerce becomes responsible for a larger portion of the overall market, something will have to give. Forrester Research has predicted that the revenue generated from online retail will reach $108 billion by 2003.

US states rely on retail sales taxes for a large portion of their revenue, Goolsbee said, and it could conceivably cost the states not to tax Internet commerce when it generates these predicted revenues. In his research, Goolsbee draws several comparisons between Internet commerce and the mail-order business, which has grappled with taxation issues in the past. But despite the larger sales associated with mail-order purchases, states have expended the effort to tax Internet purchases because they feel Internet commerce is the wave of the future and has taken business away from mail order, Goolsbee said.

“At the point at which Internet retail gets bigger than mail order, the fact that people aren’t paying taxes will take a bite from the states,” he said. In his research, Goolsbee points out that applying taxes to the Internet without applying them to mail order could make consumers switch their distribution channel to keep their purchases tax free

“I think eventually there will have to be some kind of harmonization with the catalog business,” Goolsbee said.

The enforcement of potential Internet taxes will remain an issue due to factors such as the international appeal of e-commerce, and the fact that Internet purchases such as software can be downloaded rather than shipped to a mailing address. Goolsbee said a tax from the location of the seller would be easier to enforce, but could lead to servers heading to Canada from the US, or to states without a sales tax.

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