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INTRODUCTION 415Neutrality
The neutrality argument is often described as needing to
“level the playing field.” For example, if consumers can
purchase books from an online bookseller that has no
physical presence in the state where the consumer re-
sides, no sales tax need be collected. In contrast, if the
consumer walks into a bookstore and purchases a book,
sales tax will be collected. Thus, neutrality does not ex-
ist because the tax result may influence the individual’s
decision on how to buy the book (although this might
be mitigated by the shipping and handling costs typi-
cally charged by Internet vendors). Many “Main Street”
vendors would like to see Congress enact legislation that
would allow states to collect sales and use taxes from
nonpresent (remote) vendors in order to “level the playing
field.” Due to the complexities of the sales tax rules, which
vary somewhat among the over 6,000 jurisdictions in the
United States that impose this tax, Congress is unlikely
to impose additional collection burdens on vendors until
some simplification is achieved (and even then, of course,
the nature of any congressional action is uncertain at this
point).
For companies that have collection responsibilities due
to a physical presence in most, if not all, of the 46 states
imposing a sales tax, compliance costs can be very high. A
multistate company will need to hire several individuals
to satisfy its compliance obligations, acquire software to
assist in the process (which requires at least monthly up-
dates), and to keep up with changes in the law in each state
in which it does business. Large companies with many
physical locations must budget the resources to comply
with all of these tax systems. However, as noted earlier, the
Internet allows new and small vendors to operate in many
states without needing any capital for physical (bricks and
mortar) expansion. Such vendors would likely be put out
of business or not seek the market potential presented by
the Internet if faced with obligations to collect sales and
use taxes from customers in 46 states and multiple local
jurisdictions. While software solutions are available, the
cost, along with the need for personnel to operate the soft-
ware, means that this is not a feasible solution for most
small businesses.
The task of reducing the existing complexities for mul-
tistate vendors are challenging because in some states,
such as Colorado, cities define the tax base, which could
(and does) differ from the state tax base. Also, local tax
rates are not always bound by zip codes. Instead, some
zip codes can include more than one local tax rate. In ad-
dition, definitions of items (such as handling costs) differs
from state to state, as do exemptions from the tax. In addi-
tion, tax forms and due dates, as well as audit procedures,
vary from state to state.
The costs of complying with the tax rules of multi-
ple taxing jurisdictions can be significant in terms of
labor costs, training, computer systems, need for con-
tinual updates due to changes in laws and regulations,
audit costs, credit card fees, and risk of error. A 1998
study by the State of Washington on sales tax compli-
ance costs determined that compliance costs as a per-
cent of total state and local sales tax collections were
as follows (Washington State, Department of Revenue,
1998):Small business 6.47% (gross sales between $150,000
and $400,000)
Medium business 3.35% (gross sales between $400,000
and $1,500,000)
Large business 0.97% (gross sales over $1,500,000)
Total cost weighted by
number 4.23%
Total cost weighted by
dollars 1.42%The significance of the administrative costs to vendors
means that if collection obligations are to be expanded
(such as by requiring remote vendors to collect sales tax),
vendors will continue to demand simplification, as well
as compensation for the costs of collecting the govern-
ment’s revenue. The greater costs for small businesses
(relative to their sales) support consideration of collec-
tion exemptions for small businesses. Of course, such an
exemption would violate the neutrality principle unless
the customers of small businesses were required to remit
the tax (which raises a complexity issue). This would be
an example of the need to weigh the benefits of simpli-
fication and neutrality, since a government is unlikely to
achieve the ideal tax system.
Other taxes being looked at in the discussions of e-
commerce and Internet are telecommunication taxes im-
posed by federal, state, and local governments. The com-
pliance burden can be fairly high for these types of taxes.
A study by the Council on State Taxation (COST, 2002)
found that the national average effective tax rate for trans-
action taxes on telecommunications services was 16.90%
compared to 6% for sales of goods. In addition, filing obli-
gations in the state and local jurisdictions totaled 66,918
returns for telecommunications taxes compared to 8,284
returns for general businesses.
The COST study also found that telecommunications
companies have 391 types of taxes imposed upon them
by state and local jurisdictions, compared to 118 for gen-
eral businesses. In addition, only 16 states have a sales
tax exemption for communications equipment while 37
states have an exemption or reduced rate for manufactur-
ing equipment. These results point to a neutrality issue to
the extent that regulated telecommunications companies
may be subject to more taxes than nonregulated compa-
nies that may provide similar services (for example, an In-
ternet service provider (ISP) providing Internet telephony
that is not subject to telecom excise taxes).Revenue Protection
A final reason why e-commerce taxation issues require
resolution is that there is a potential for revenue loss
at each level of government. For example, because the
e-commerce business model enables businesses to op-
erate with few physical locations, yet reach customers
throughout the world, states will find that there are more
nonpresent vendors not required to collect sales tax. Al-
though consumers purchasing taxable items from non-
present vendors should self-assess use tax and remit it
to the state, use tax compliance and enforcement is very
low and it is difficult to collect the tax from consumers.
Several states do attempt to collect the use tax by having