Internet not the problem; it's the tax structure

Did you do any Christmas shopping on the Internet last month? If so, why did you buy online rather than at a regular store made with bricks and mortar? Was it because you wouldn't have to pay taxes on the purchase, or was there some other reason?

As 2004 gets under way, these questions are swirling in the political waters of Washington like blood against an onslaught of hungry bureaucratic sharks, and the answers to them could decide the futures of both the World Wide Web and the economy.

The federal moratorium on Internet taxes has expired, and unless Congress acts soon to either extend it or make it permanent, any of an estimated 10,000 state and local taxing entities in this country are about to sink in their teeth.

State officials will eagerly tell you they are losing money because of the Internet. It's hard to put exact figures together, but some estimates put the total amount of online sales in 2003 at $41 billion. That's still a tiny amount compared to overall retail sales, but it's a growing figure, and it represents a healthy chunk of change that local governments are missing out on in terms of sales taxes.

Under current rules, Internet retailers are supposed to collect taxes only on sales made to people in states where those retailers have either a warehouse or some other physical facility. In many states, including Utah, consumers are required to voluntarily submit the taxes they owe on purchases from out-of-state companies.

Only a government would think of making a requirement voluntary. Not surprisingly, very few people actually do this.

In 1998, and again in 2001, Congress passed temporary bans on Internet taxes. Originally, the reasoning was that this burgeoning new industry ought to be allowed to grow and expand a bit before being saddled with tax burdens. That reasoning quickly changed during hard economic times. Suddenly, the concern was more with what taxes would do to unemployment rolls.

Both were, and still are, valid concerns.

Ironically, Utahns are playing pivotal roles on both sides of this issue. Former Gov. Mike Leavitt, who now heads the EPA, is thoroughly convinced of the need to apply sales taxes to the Internet. For him, this is a question of fundamental fairness. The store down the street shouldn't be made to compete with some faceless retailer who can give you the same items cheaper because they are tax-free. If this is allowed to continue, he argues, state and local governments eventually will go bankrupt. They won't be able to provide the police and fire protection and other essential services that society requires.