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A Consumer's Perspective on the Use Tax and Electronic Commerce
Abstract
Taxing electronic commerce is one of the most contentious tax policy issues facing state governments in the 21st century. This article focuses on tax compliance and the reaction of consumers towards taxing electronic commerce sales. Most of the existing work has focused on state governments and how they are responding to this tax policy issue. The key question asked in this article is “if a sales tax were charged on online purchases, would consumers buy less?” This study uses a national survey and found that nearly 50 percent of consumers who purchase online would buy less if a sales tax were charged for online purchases. Controlling for other factors, individuals who agreed that they would purchase less were more likely to be male, married, very social, have more years of online experience, and heavy spenders on purchasing goods or services on the Internet.
Internet commerce involves sales tax, which is under the jurisdiction of the state and local governments. If the seller and buyer don't reside in the same state, the tax analysis can be complicated. The U.S. Supreme Court has ruled that there must be nexus between the seller and the state before the seller can be required to charge sales tax to the buyer and remit it to the buyer's state of residence. New York's Amazon tax law attempts to use Web site connection as a nexus between the seller and the state. Location of residence becomes critical. But in the digital age product can be transferred from one computer to another, and computers can be located anywhere. Residencies of the buyer and seller may be completely obscured. For international transactions the situation becomes even more complex. This article suggests that sales tax jurisdiction be changed from state and local governments to the federal government.
This paper takes a pragmatic look at the appropriate sales tax policy for the Information Highway, composed of Internet/on-line service providers, content, hardware/software, and tele-communications transmission. Our general conclusion is that the sales tax should be designed to be largely con-sistent with the current structure. At the same time, we argue for a more inclusive approach to taxing final sales and a more liberal treatment of business input pur-chases. Specifically, we argue for destina-tion-based taxes; an economic concept of nexus preferably enabled through Con-gressional action; a direct use rule for ex-emption of business purchases; and the enumeration of nontaxable as opposed to taxable transactions. Neutrality should be enhanced by taxing similarly all functionally equivalent activities.
The courts have found that Internet commerce is similar to interstate commerce in that it is largely exempt from taxation. Nonetheless, many state governments are attempting to tax the Internet broadly, levying transactions that would otherwise be considered nontaxable under the Commerce Clause of the U.S. Constitution and related interstate commerce statutes. This investigation assesses the current status of the taxation of Internet commerce and seeks to identify the factors that are associated with how states apply taxes to Internet commerce. Although a number of demographic, fiscal, and state organizational factors are associated with the application of taxes on Internet commerce, few of the relationships are strong enough to merit further attention. Moreover, recommendations are made to Congress, governors, and legislatures regarding how they may ensure that laws and programs designed to regulate the collection of Internet taxes are implemented in the fairest and least disruptive manner possible.
The remote vendor problem challenges the sales tax as a revenue producer, but even more critical is damage to economic balance, efficiency, and fairness. Congressional relief from the physical presence rule - rendered obsolete by uncertainty about what presence means and by "click and brick" affiliates - requires no undue burden for multi-state enterprises. State adoptions of a burden-reducing common tax structure would be virtually impossible because states have substantially different shares of their tax systems at stake in the sales tax and because they start from unique sales tax structures designed for their own economies and politics. Congress could handle the problem by requiring registration for large remote vendors, but only for states affording the vendor-friendly compliance (no local use taxes and reasonable collection compensation).
Being designed for a world of tangible products, the tax systems employed by the states are ill suited for a world of electronic commerce. This is perhaps most obvious in the case of the sales tax. The sales tax departs from widely accepted tenets of taxation in ways that will become increasingly troublesome as electronic commerce grows in importance. The most pressing problems are complexity and the resulting constitutional inability to collect tax on many interstate sales made to consumers by remote vendors (those lacking a physical presence in the taxing state). Concerted efforts have been underway for several years to find a way to simplify the sales tax, but in ways that fail to address other fundamental problems, and, in fact, may even fail to achieve the corollary objective of allowing taxation of sales by remote vendors. This article describes the problems with the sales tax and summarizes recent efforts to simplify the tax. Because I have described and discussed the problems in detail elsewhere, the descriptions and discussions presented in Section II are rather skeletal; the notes contain further references. The most recent effort at simplification, which is ongoing, is described in greater detail in Section III, not only for its own sake, but also to illustrate the range of complex problems that must be overcome in any effort to simplify the sales and use tax.
Retail sales on the Internet are growing at a rapid pace. Some states have tapped into this potential revenue source with Internet sales taxes, while others have not. What are the factors that lead states to make these policy decisions? Using a 50–state comparative research design, we find that interest groups, as much as the partisan and economic factors emphasized in previous research on state tax policy, are correlated with adoptions of these state tax innovations. Furthermore, this interest group influence is not limited to a single industry, but comes from self-interested groups representing both sides of the issue, including newly emerging technology interests.
The Internet Tax Freedom Act (ITFA), which imposes a moratorium on state and local taxes on Internet access and prohibits "multiple and discriminatory" state and local taxes on electronic commerce, has been extended until November 1, 2003, but the debate on whether and how to tax electronic commerce has not ended. This paper is intended to assist clear thinking about the taxation of electronic commerce. Under an economically neutral sales tax, all sales to consumers would be taxed, all sales to business would be exempt, and sales by local merchants and by remote (out-of-state) vendors would be taxed equally. A compliance-friendly sales tax would exhibit substantial simplicity and interstate uniformity in the tax base, legal framework, and administrative procedures. Existing sales taxes exhibit none of these characteristics. Many sales to consumers are exempt, many sales to business are taxed, and, because of the Supreme Court decision in Quill, which is based on the complexity of the system, many sales by remote vendors are not taxed. The system is extremely complex, in large part because there is essentially no uniformity from state to state. Under the Streamlined Sales Tax Project the states have recently begun serious efforts to simplify their sales taxes, by making them more nearly uniform, in hopes of gaining Congressional or judicial reversal of Quill. These efforts would substantially simplify the system, but would not achieve economic neutrality, as many sales to consumers would remain exempt and many sales to business would still be taxed. Moreover, differences in tax bases, legal frameworks, and administrative procedures would remain. Technology (lookup tables that categorize products as taxable or exempt in each state) might be able to handle differences in tax bases, but not those in legal structures and administrative procedures.
Current tax law--and the current technical architecture of the Internet--make it difficult to enforce sales taxes on most Internet commerce. This has generated considerable policy debate. In this paper, we analyze the costs and benefits of enforcing such taxes including revenue losses, competition with retail, externalities, distribution, and compliance costs. The results suggest that the costs of not enforcing taxes are quite modest and will remain so for several years. At the same time, compliance costs are also likely to be low as Internet infrastructure evolves to make enforcement easier, and states coordinate to harmonize their statutes. There are benefits to nurturing/subsidizing the Internet but they tend to diminish over time. When tax costs and benefits take this form, a moratorium provides a natural compromise.
Because of difficulties collecting sales taxes on Internet sales, several states have engaged in an effort (the Streamlined Sales Tax Project, SSTP) to simplify their sales tax systems. One hope among SSTP proponents is that a simplified system will result in Internet vendors voluntarily collecting the sales tax. We address two issues:
Will states adopt the extensive reforms proposed by the SSTP?
Will vendors voluntarily collect the sales tax?
We argue that states are unlikely to adopt extensive reforms, but if they did, many vendors would voluntarily collect sales taxes.
After its first exposure to the public in 1993, there has been a rapid increase in the use of the Internet for different purposes, particularly for electronic trade. In such a new trade area, there are a lot of issues to be addressed with regard to the consumer's purchasing behaviour. This study analyses the roles of sexual preference, primary place of online access, and online experience as well as demographic and economic factors on the consumer's purchasing decision. Moreover, this study investigates the impact of the potential and/or prevalent critical issues facing the Internet (e.g. taxation of services, privacy, censorship, etc.) on online orders. Surprisingly, sexual preferences have a large significant effect on online purchases. Gay and bisexual people are more likely to shop from the Internet than the other ones. The results, also, suggest that people with more online experiences in a more private and secure environment like home are disposed to order more from the Internet. In addition to that, only the issues of taxation of services and privacy have some statistically significant effects on online purchasing decisions. The former and latter have positive and negative impacts on online orders respectively.
Although most arguments supporting preferential tax treatment of electronic commerce are suspect, the existence of network externalities provides one potentially defensible rationale. This paper considers (1) direct network externalities, which arise in communications networks like the Internet, (2) indirect network externalities, which arise in computer hardware/software systems in imperfectly competitive markets, and (3) learning network externalities, which arise when existing network participants assist new users. It concludes the case for preferential treatment is weak, and that proposed blanket sales tax exemptions of remote (or all) e-commerce are especially inappropriate. Finally, the paper comments briefly on US sales tax reform efforts. Copyright Kluwer Academic Publishers 2003
Despite the intensifying debate over the taxation of internet commerce, the relevant issues have not been given a systematic treatment in the context of the literature on optimal taxation. We present such an analysis, and investigate separately the taxation of business purchases of intermediate goods, the taxation of consumer purchases of final goods and services, and the various issues of administration and compliance costs as they apply to the development of e-commerce. We conclude that, generally, the optimal tax literature can not be used in support of a blanket tax exemption for internet purchases. Certain conditions could lead to the optimality of an exemption, but those conditions are not likely to be met in practice.
The rapid rise in sales over the Internet and the fact that most Internet buyers pay no sales tax has ignited a considerable
debate over taxes and the Internet. This paper uses new data on the purchase decisions of approximately 25,000 online users
to examine the effect of local sales taxes on Internet commerce. The results suggest that, controlling for observable characteristics,
people living in high sales taxes locations are significantly more likely to buy online. The results are quite robust and
cannot be explained by unobserved technological sophistication, shopping costs, or other alternative explanations. The magnitudes
in the paper suggest that applying existing sales taxes to Internet commerce might reduce the number of online buyers by up
to 24 percent.