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Uniform sales tax agreement paves way for levies on Internet purchases

© Alan Kotok

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The tax-free purchasing haven known as the Internet may be nearing an end, as delegates from 32 states on 12 November 2002 approved a model interstate agreement to reform and streamline the USA's localized sales tax system. Many customers buy goods and services over the Internet to avoid sales tax charges, to the discomfort of storefront retailers and governments dependent on sales taxes for revenues.

Current tax moratorium expires in 2003

In November 2001, the Internet Tax Nondiscrimination Act that became Public Law 107-75, extended the moratorium on Internet taxation to 1 November 2003. But unlike other taxation issues, Internet taxation does not a have clear ideological boundaries. Co-sponsors of the Internet tax moratorium in the House of Representatives ranged from conservative Republican Christopher Cox of California to liberal Democrat Cynthia McKinney of Georgia (who lost her primary race for re-election). Likewise, supporters of the uniform sales tax proposals include Republican governor Mike Leavitt of Utah and Democratic governor Paul Patton of Kentucky.

Supporters of keeping the Internet a tax-free zone cite the complexity of tax calculations as a reason for the exemption. The National Governors Association (NGA) that backs the uniform sales tax proposal agrees, and notes that America's sales tax system, with 7,500 state and local taxing jurisdictions across the nation, is antiquated, complex, and cumbersome to businesses. Not only do the tax rates differ from one jurisdiction to another, the items subjected to tax differ as well. Food and medicines, for example, are exempt from taxes in many jurisdictions, but food served for consumption on the premises is often subject to tax. Therefore, a coffee bar would need to tax coffee served in a cup, but exempt the sale of ground coffee in a bag.

Complexity argument nullified

As a result, the uniform sales tax agreement removes one of the main arguments for the tax exemption. The agreement among states this November would establish uniform definitions for taxable goods and require participating states and local governments to have only one statewide tax rate for each type of product effective in 2006. And storefront retailers would have a more level playing field in their competition with mail-order and Internet merchants. A report issued by NGA last year projected state and local governments would lose some $440 billion through the year 2011 without a change in the current system.

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