After reviewing some of the information available on this very complex subject of Internet taxation, it appears that an interim solution might evolve from the final report and recommendations of the Advisory Commission on Electronic Commerce. Any recommendation would probably include an extension of the moratorium on taxes on Internet access.
It must be acknowledged that use of the Internet and transactions on the Internet have precipitated a great deal of dialogue on taxation issues. Although there are
serious and complex issues, it appears that a resolution can be constructed that addresses most of the issues and does not disrupt what is clearly one of the most significant economic engines, of modern and perhaps all, time.
A solution or solutions will need to respect the needs of state and local governments, which depend on sales taxes to provide funds for basic state and local governmental services, and, at the same time, support electronic commerce as a mechanism for enhancing our economy and quality of life.
It seems that state and local governments can develop systems with innovative concepts and procedures which allow them to collect taxes due without creating an unnecessary bureaucracy and roadblocks to the normal expansion of the electronic commerce business growth and development.
There can be a combination of workable solutions including technology being applied to the collection process, standardization of tax systems, utilization of private-sector partners and assumption by state and local governments of the responsibility to pay the costs of newly developed and technologically sophisticated collection systems.
A version of the electronic commerce technology for tax administration, developed and operated by a major US company, is being used in Europe to collect transactional value-added taxes at the time of sale (National Tax Association, 2000). This system contains most of the features that states would find necessary for the proper and efficient collection of their taxes. Additional features that would be desirable are within technical reach and are under development by at least one other company. The technology of electronic commerce is itself a major resource for helping solve the long-standing sales and use tax issues.
Another key element of the solution will involve interstate standardization and simplification of key features of sales and use tax systems. State and local governments have acknowledged that their system of sales and use taxes must change in a substantial manner if they are to remain viable in the 21st century (National Tax Association, 2000). Since the Internet is a vast multinational framework comprised of more than 150,000 individual networks and used by more than 304 million people around the world (Advisory Commission on Electronic Commerce, 2000), taxing authorities are now moving toward the development of multistate systems that will help remove complexity and add simplicity to the process. This simplicity movement will provide a foundation for changes in tax laws and procedures necessary to enable the technology for tax administration to work effectively and efficiently for e-commerce. The two most prevalent areas involving simplification are local option taxes and exemp- tion administration.
The United States Supreme Court, in its Quill decision, made it clear that states cannot impose the obligation of use tax collection on remote sellers whose contacts with states are limited in nature because of the burden of collection for those sellers.
Thus, it seems if sales and use taxes are to be equitably collected at the time of sale, state and local governments will need to assume the costs and burden of collection for remote sellers who are constitutionally protected. Therefore, state and local
governments, working in concert with the private sector, could incorporate the court’s direction into a solution for sales and use tax collection issues.
It seems that a new system of sales and use tax administration could be designed around the needs of electronic commerce. What is really required to resolve the sales and use tax issues, more than just technology and simplifications and financing, is leadership among state and local officials, technology companies and interstate marketers that would provide the vision and imagination to move forward in developing a new system of administration. The new system could accomplish the collection of taxes on an equitable and efficient basis without burdening remote sellers. In the end, both state and local governments, the growing electronic commerce industry and the taxpayers and consumers can benefit from the creative genius of the leaders of our time.
CONCLUSION
Seven criteria laid out for use in designing an acceptable cybertax system may form the basis of an effective resolution: The system should be equitable and simple, ensure user confidence, prevent tax evasion and economic distortion, maintain a fair balance among countries, and not introduce a new form of taxation (Kyu Lee &
Hwangbo, 2000). Since part of the solution revolves around technology, a growing number of software companies are developing powerful new programs that promise to streamline the collection of sales taxes, both on the Internet and from traditional brick-and-mortar sellers. However, without the assurance of a uniform nationwide approach, even the most sophisticated technological solution will collapse. It is critical to resolve the e-commerce taxation issue by finding a feasible way to implement a multistate system for collecting taxes from literally hundreds of tax jurisdictions across the country. The Streamlined Sales Tax Project has been launched by some 30 state governments “to develop a radically simplified sales and use tax system that eases the burden of state use and tax compliance for all types of retailers, particularly those operating on a multistate basis” (Rankin, 2000). The outcome will have long-term consequences for US retailing and, according to some, for the American system of government itself.
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Advisory Commission on Electronic Commerce. (2000). Report to Congress, April, 7.
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Figure 1: State taxation of the Internet
APPENDIX
State Taxation of the Internet: State-by-state tax treatment of Internet access, sales and software.
Figure 2: State taxation of the Internet (continued)
Source for Figures 1 and 2: State Taxation Institute
1 Initial setup taxable if software is provided.
2 Commercial use only.
3 The first $25 of a monthly charge is exempt.
4 Exempt unless purchaser receives a backup copy or manual in addition to downloaded software.
5 Custom"Systems" software sold to a business is taxable, custom "application" software remains nontaxable. Modified canned programs are still considered a sale of canned software if the charge for the modification is no more than half the sale price.
Source: 1999 U.S. Master Sales and Use Tax Guide