Washington (Oct. 27, 2003) -- The lapse of the Internet Tax Freedom Act of 1997 on Nov. 1 did not directly affect the ability of state and local governments to tax goods over the Internet, but it may lead state governments to create a collusive regime to tax goods sold across state lines, according to the Cato Institute.

This would result in burdensome compliance and a loss of beneficial tax competition, argue the Institute's director of telecommunications policy Adam Thierer and fiscal policy analyst Veronique de Rugy, authors of a new Cato Institute study.

"If tax rates fall because of cross-border competition, it is likely that loopholes will disappear and the tax base will be simplified," they say. "Taxing sales at the point of origin remains the most fair and neutral way to collect revenue and keeps the channels of interstate trade open."

Contrary to the arguments of state governments, Thierer and de Rugy contend that Internet sales are not to blame for the current state budget deficits. In 2002, e-commerce accounted for just 1.3 percent of total retail sales. The authors write that "to the extent there is a state and local budgetary 'crisis' today, it has much more to do with the massive spending spree by states in recent years."

The Supreme Court has ruled that states can only tax firms with a physical presence, or "nexus," within their jurisdictions. According to Thierer and de Rugy, "the guiding ethic of this debate must remain tax competition, not tax collusion."

-- WebCPA staff

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