States could reap considerable revenues from goods and services purchased over the Internet
In its current review of our country's tax structure, Congress is struggling with how to tax the goods and services purchased over the Internet. Although e-commerce doesn't generate much revenue for the federal government, it has the potential to impact state and local revenues enormously.
E-commerce may represent a relatively small portion of the overall economy, but its burgeoning growth rate is something we can't ignore. In fact, Internet commerce doubles every ten months or so. This means that e-commerce sales could reach $100-billion by the time the proposed changes in tax rules take effect.
The main players in the tug of war that is taking place over how to structure taxes on e-commerce revenues are the states and the commerce providers, including Internet services.
Internet services need to maximize the amount of commerce that takes place on the Web in order to establish the cash flow needed to support their infrastructure (investment in software, for example). In terms of cash flow, there are a number of advantages to conducting business over the Internet. For one thing, few salespeople are needed; secondly, payment is often electronic and immediate. Not to mention the fact that a transaction trail is virtually guaranteed by the electronic files that are created. As a result, consumption patterns can be identified immediately and adjusted accordingly.
But there are also some disadvantages to this new sales venue - particularly for state and local governments, which could benefit from the tax revenues associated with Internet sales. It's a source of revenue that's becoming increasingly important to them as more and more legal barriers are put in place for the use of property-tax revenues.
To begin with, transactions occur in an environment that is not currently subject to the standard procedures for collecting sales tax. Currently, most sales transactions are captured and their taxes paid by the local establishment within the authority of the taxing agency. If you don't pay the sales tax promptly, you don't do business in that location for very long. However, if you're an out-of-state source for sales, it may take a state quite a while to track you down. Indeed, many consumers have been enticed to shop over the Internet because they can avoid local sales tax.
The rub occurs when there's a shortfall in the expected revenue stream for the agency providing public service. There has not been a history of cooperation between bordering states when the commodity sought is in high demand and subject to significant taxation - alcohol and tobacco come to mind immediately. In fact, many towns bordering Canada or Mexico have substantial economies based on the purchases made to avoid taxes, either direct or indirect. Unless there's substantial cooperation among states, this scenario is likely to continue.
E-commerce is definitely here to stay. Not only is it likely to change traditional channels of distribution, it might also change how we think about redistributing wealth. And sales tax is only one of the taxes that will be affected. Payroll taxes, property taxes, tangible property taxes, and income taxes could also be affected as commerce shifts from traditional locations to the Internet.
While it may not be easy to figure out how to collect state and local taxes for e-commerce transactions, someone will do it. I have faith in my taxman. I'm sure he'll figure out how to find me and how much money to take.