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A question of fairness: Why not tax Internet sales?

We have all heard of the two inevitabilities: death and taxes. While we can not prevent the former, paying the latter isn't so bad. We would all like not to pay taxes, especially, income, property and sales tax, but in our society, that's not practical. However, that appears to be the result of the recent (in)action of the Advisory Commission on Electronic Commerce for failing to come to any conclusion on the issue of sales taxes on purchases made over the Internet.

The argument in favor of not allowing sales taxes on purchases made via the Internet sounds great. These tax-free sales will allow e-commerce to flourish and aid a growing industry. This expanding sector of our economy will create jobs, require the use of real estate and fuel the economic expansion. Sounds great, so far. But what happened to fairness?

To the extent that consumers can purchase merchandise via the Internet and save that sales tax, then yes, they have come out ahead. However, this is not a win-win situation. The book or CD that I purchase from the amazon.coms of the world are purchases that I did not make from my local brick-and-mortar retailer. That retailer employs my neighbor or my child; rents a store in my local shopping center that pays property taxes to my town, county and school district; and buys goods and services from other countries. We have not mentioned sales taxes, which go to support our government and school districts. In some states, sales taxes account for almost half of the state's revenues.

The International Council of Shopping Centers (ICSC) estimates that, by extrapolating the U.S. Census Bureau's estimate for retail e-commerce sales for the fourth-quarter 1999, total Internet sales for the full 1999 calendar year would be $16.6 billion (ICSC White Paper, April 2000). and the Boston Consulting Group, in a recently released report, predicted that e-commerce sales in 2000 would increase to more than $61 billion. Apply an average sales tax of just 5%, and, well, you do the math. Even here in New York, that's a lot of money.

We need to look beyond saving a few bucks in sales taxes when we purchase over the Internet. We need to keep a level playing field. I am not against using my computer to make purchases for reasons of convenience or price. But I am opposed to giving one type of merchant an unfair advantage over another. Let them compete fairly, but don't make one sales tax-free so that my income and property taxes can increase to make up for the shortfall in sales taxes. By one estimate that I read, states lost more than $500 million in uncollected sales taxes in 1999. I don't know what portion of that came from my state or town, but someone has to make up for it.

Where do we go from here? Our national politicians would have us all tax-free because it's not their problem and it sounds great. But ask any school superintendent, village mayor or county executive how important sales tax revenues are to their budgets, and you will find out the real answer. Unless you want 35 students in a class, potholes in your streets or once-a-month garbage pickup, the money has to come from somewhere. Here are some possibilities:

- Tax Internet sales the same way that catalog sales are treated.

- Tax Internet sales at the federal level to create uniformity and distribute the money to the states at some agreed upon formula that reflects population or where the merchandise was sent to.

- Eliminate the sales tax exemption from catalog and Internet sales.

If I were an odds-maker in Las Vegas, I would bet on none of the above. Expecting politicians to do the right thing when doing nothing is an option is being very optimistic. I read one estimate that there are approximately 30,000 e-commerce sites and that an estimated 25,000 will disappear within a few years as a result of both their failure to make a profit and also the growing trend of bricks-and-mortar retailers to develop their own Web sites.

Then there is the question of returning unwanted merchandise - a fact of life for retailers and a pain in the neck for consumers. While the Internet retailers have figured out how to get the merchandise out the door, taking it back is not so easy. When the customer who made a purchase at can return it directly to the store instead of taking it to the post office, it becomes an advantage for the traditional retailer, not to mention an opportunity to sell something else. As the pure Internet retailers disappear and the regular retailers pick up those sales, we can expect to see those sales tax revenues reappear in the municipal coffers.

So much for creating a tax-free environment for Internet retailers to flourish. The first chapter in Internet retailing has barely been written, and the last chapter is nowhere in sight. For me, I'll stick with Darwin: Only the strong will survive.

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