by Lance T. Izumi, Fellow in California Studies
Pacific Research Institute
January 11, 2000

Announcer lead: Time for Perspectives. Lance Izumi says that proposals to tax Internet sales are unjustified.

With sales over the Internet at record levels, and with the congressional moratorium on Internet taxation set to end next year, many politicians are salivating at the prospect of taxing Internet commerce. For example, Bay Area Republican Congressman Tom Campbell recently came out in favor of allowing states to impose Internet sales taxes. Such taxes, however, are unwise, unneeded and unconstitutional.

Any time government increases taxes on commercial transactions, fewer of those transactions take place. Internet commerce is no exception. According to a recent survey, nearly 60 percent of online buyers would make fewer purchases if they had to pay an Internet sales tax. Fewer purchases would mean fewer businesses and more unemployed Web designers, technicians, and other high-tech workers.

Further, untaxed Internet commerce doesn't drain state and local treasuries. Dean Andal, vice chairman of the California Board of Equalization, which oversees the state's sales tax, says there's no evidence that Internet commerce threatens adequate revenues for government services. Andal notes that from 1994 to 1998, while untaxed Internet sales were booming, California's tax revenues from regular retail sales increased by more than 28 percent.

Finally, allowing a state to tax a transaction between a state resident and an out-of-state merchant violates the constitutional limitation against states taxing interstate commerce. According to the U.S. Supreme Court, a state can only tax a transaction if a merchant has some real physical presence within a state's borders. This is fair since state and local sales taxes pay for roads, police and other government services that benefit in-state but not out-of-state merchants.

Internet commerce has been a huge boon to our economy. Government should therefore leave well enough alone and not kill the goose that is laying so many golden eggs.

With a perspective, I'm Lance Izumi.