Taxation of the Internet Essay

This essay has a total of 1824 words and 8 pages.

Taxation of the Internet

Taxation Of The Internet

The Internet or the Global Electronic Infrastructure has now been around for about a
decade already and it has already changed how we live our lives. Over the next decade, we
will find that almost every aspect of our lives including education, health care, work and
even leisure activities will be affected. We have already seen this occurring with the
increasing use of cell phones, pagers, GPS systems, PDA's, and many more gadgets that we
use in our everyday lives. The Internet is a vast collection of information that consists
of millions of web pages, news articles, audio and video clips, etc. There are several
uses of how one can use the Internet for example students who have access to a library all
the way across the globe or students who take their classes at a university on the other
side of the country, doctors who are able to help other doctors and their patients and
even a new way for consumers to purchase goods. Over the past few years, the Internet has
developed into something that none of us could have ever imagined, a place where goods and
ideas can be exchanged with the slightest of ease. It has opened up a new door into
commerce and online shopping. Many companies are now opening up their doors exclusively
onto the Internet. Companies such as and, as well as many others are
all internet-based. Under the Supreme Court's Quill decision, remote sellers, such as an
Internet retailers, are not required to collect local sales tax for the sales made in the
state where the seller does not have a physical location. This absence of a physical
location for online retailers gives an unfair advantage over the traditional local shops.
In 1998, congress passed legislation called The Internet Tax Freedom Act, which imposed a
three-year moratorium on new Internet access taxes and on discriminatory taxes on
e-commerce (E-Fairness). This Act also set up the Advisory Commission on Electronic
Commerce to complete a report and devise a plan on whether the internet should be taxed
and if so how (Lilly "Citizens for a sound economy"). This three-year moratorium placed a
policy of no taxes on the Internet, until April of 2001. This was done to make sure that
the E-Commerce market was able to properly grow and expand. However, now that it has grown
and has stabilized out it is time to place a sales tax for all internet transactions that
take place on this global market-place.

Over the past few years, the Internet and E-Commerce market has been experiencing a rapid
growth period. Many people have argued that the government should not tax something that
is growing at such a high rate. If a tax is imposed, then the Internet economy may slow
down to the crawl that is characteristic of many other heavily regulated areas of the
economy. The businesses are growing and we have seen that in the last six months that the
Internet economy has been slowing down. This is a sign of a stabilizing market or a market
that is mature now. When the market becomes stable as it is seen, the government should
impose the tax. The companies that are left in the industry and the consumers who are
purchasing the goods can afford to pay a tax. A large majority of the dot-com startups
have been kicked out of the competitive high tech industry. However, larger and more
stable online companies such as or have been able to maintain their
position in the industry. This shake out of smaller less stable companies shows that the
economy is maturing and is ready for a tax.

According to the International Data Corporation in a study in 1999 Internet commerce would
exceed to roughly $1 trillion worldwide by the year 2003 (Bonnet "Sales tax and the
internet"). Approximately, seven percent of all U.S. retail sales will be conducted online
by the year 2002 (Bonnet "Sales tax and the internet"). A recent report from the U.S.
Dept. of Commerce, shows that sales from many e-commerce companies has been increasing
steadily for the past one year (U.S. Dept of Commerce Retail E-Commerce sales). The
Internet generates large quantities of sales that have been going untaxed. This gives a
competitive advantage to the remote sellers to conduct business online and puts them to
enjoy a tax haven. By doing this, more businesses will move all their transactions to the
internet just to avoid having to pay the extra sales tax. This leaves behind the
traditional "brick and mortar" retailers to compensate by paying higher taxes and they are
put at a considerable disadvantage. Not only are the traditional shops losing out, but
also the local and state governments who are the recipients of tax money. State and local
governments rely on sales tax to fund their budget. Programs such as education, police,
fire, and transportation are all funded completely from sales tax. Without sales tax these
programs are as good as gone. The state would not be able to educate our children, its
fire departments would not be able to have enough firefighters to put out the fires, and
the police departments will not have enough police officers to keep our streets safe. If
an online retailer conducts business in a state, then the state government and its
constituents are losing on a considerable amount of money. In June of 1999, The Ernst &
Young report estimated that state and local governments lose roughly $170 million due to
business-to-consumer transactions that were not taxed (Mauro 86). That is $170 million
less that will go to helping our schools, transportation, fire departments, police
departments, etc. If this money had been taxed, California and other states would be able
to improve their school system as well as pay for many other programs that are in need of
funding. The lack of sales tax will force the government to cut essential programs out of
the state budget causing sever damage to the constituents in that state.

The idea that those who purchase goods or services over the Internet cannot afford to pay
taxes is wrong. The majority of those who purchase items over the Internet are those who
belong to the more affluent sector of society (Silicon Valley News "Why an
internet-moratorium is needed). These people make enough money through their jobs that
they can afford to purchase those extra or non-essential items through the internet such
as that third television set for their home, a new computer or even a new car that they
have always wanted. A poll by PC data magazine shows that of the people survey the new
policy of no tax on the internet currently ships business away from the traditional shops
and fifty-seven percent of home internet users said that they did take sales tax into
consideration when they purchased something off of the internet (Gee wax "Taxing internet
sales"). If people can afford to buy items like the ones mentioned above, then they can
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