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Taxes--Background on Internet Taxation
Issue: In 1998, Congress passed a three-year moratorium on new taxes on commercial Internet transactions. As that moratorium draws to a close, forces are aligning on either side of the issue. On one side are groups pressing to keep the Internet a tax-free zone, arguing that taxation on consumer transactions will stunt the development of e-commerce. Senate Commerce Committee Chairman John McCain (R-AZ) has stated that he favors prohibition of sales taxes on Internet commerce. On the other side are groups, led by the National Governors Association, who oppose the ban on Internet taxation, arguing that electronic commerce should be taxed neither more nor less heavily than other commerce. These groups argue that future budgets for states and localities may be jeopardized by a continued ban on Internet taxation, with concomitant threats to state and local support of public education. Retail sales taxes are an extremely important source of tax revenue for almost all state governments. Forty-five states rely on the retail sales tax, and five obtain more than half their tax revenues from this levy. In 19 states, the tax accounts for more than one-third of total state tax revenue. The average proportion of total state-level revenues from retail sales taxes is 33.2 percent. Although Internet sales have been growing rapidly, the present exemption on Internet sales taxes has had little impact on state revenues because Internet sales still account for a small share of total consumer purchases (most purchases on the net today are business-to-business). In a few years, however, Internet sales could reach an appreciable proportion of total consumer outlays. AAU position: There are many technical issues to be resolved before sales taxes can be imposed easily on Internet sales. For this reason, AAU is not opposed to a further short-term extension of the moratorium on new taxes on the Internet. However, AAU is very concerned about the long-term effect upon public education of a permanent exemption on sales taxes on the Internet. We oppose any legislative effort at this time to enact a permanent ban. We believe the effects of such an exemption upon state revenues and state services (particularly public education), as well as the ability to administer state retail taxes on e-commerce, need to be much more carefully studied. Prepared by the Association of American Universities, January 2001
Association of American Universities |