Last year, U.S. consumers bought $7.8 billion in retail goods via the Internet. This year, according to Forrester Research, total sales will be $18.1 billion, with projected sales ringing up $52 billion in 2001 and $108 billion in 2003. For the millions who've figured out they're just a mouse click and a United Parcel Service delivery away from a new book, shirt, or software package, the Internet has been great news. But some governors, state treasurers, and local officials aren't quite as jubilant. That's because online sales, like mail-order catalog sales, are mostly free from state and local sales taxes (except when buyer and seller reside in the same state). In February, the National Governors Association called for a "twenty-first century tax" that would equally ding "main street, mail order and the Internet."
University of Chicago economist Austan Goolsbee finds that taxing the Internet would significantly stunt its commercial growth. Analyzing data from 25,000 individuals in more than 350 communities, Goolsbee concludes that a uniform 5 percent tax on Internet purchases (widely discussed by tax proponents) would reduce the number of buyers by 18 percent and shrink online sales by 23 percent. Inflicting existing state sales taxes (most of which are higher than 5 percent) would reduce the number of buyers by 24 percent and total sales by 30 percent.
For now, the Internet is safe from any such levies. In 1998, Congress put a three-year hold on new taxes on the Internet and established a 19-member commission to study how government can best support electronic commerce. But when that moratorium expires in 2001, what will happen next is anybody's guess.