WASHINGTON -- Last month, 14 million Americans bought something on the Internet. Taking advantage of what might be the last tax loophole, 99 percent of them did not pay sales tax. Without knowing it, most broke the law. States cannot force out-of-state sellers to collect sales taxes, but 45 require buyers to pay the tax anyway. Compliance is virtually nil.
Today, a congressional commission on electronic commerce takes up two key questions: How do we tax the Internet? Should we?The Internet Tax Freedom Act, passed last fall, imposes a three-year moratorium on cyber-specific taxes. By banning the infamous "bit tax," which would tax every e-mail and downloaded image, the law helped the Internet marketplace flourish. Freedom from a thicket of 30,000 state and local taxing jurisdictions has provided predictability to the Web economy.
But we have yet to address the long-term tax consequences of the movement of trade online. Last year, Americans bought $43 billion in goods and services over the Internet; next year the figure is expected to reach $250 billion. That's a lot of lost sales tax. Governments will have two choices: cut services or find this money elsewhere.
When the moratorium expires in 2001, the Internet will become fair game. Retailers who can't or won't sell online, from barbers to boutiques, will clamor for equal sales tax treatment.
The erosion of sales tax revenue could mean the end of the sales tax altogether. In Europe, where governments rely on value-added taxes, fearful authorities are already diverting inspectors from ports to the post office, where they open up individual packages looking for wily Internet scofflaws. And no one has come up with a way to monitor the purchase of digital goods like software.
Why can't we just extend the obligation to collect sales tax to Internet merchants? Thirty thousand taxing jurisdictions means millions of rules, not easily adapted to e-commerce. The big states are quiet because they themselves are high-tech leaders.
Though the commission will make its recommendations next May in an election year, it shouldn't pull punches. If the panel doesn't develop fair tax rules for the new economy, 30,000 local authorities and their overseas counterparts will be waiting.
Michael Moynihan, a former Treasury Department official, is a senior fellow at the Center for Strategic and International Studies.