Governments eye online sales tax

— 2:57 AM on December 27, 2002

Wired is running a story on what could be one of the hottest tech issues in 2003: the taxation of online sales. Congress has prohibited Internet-only taxes until at least November of next year, and states can't force "virtual" companies to collect taxes, but it's hard for governments to ignore the potential revenue that could be generated by taxing online purchases:

Estimates vary widely on how much governments are losing. One widely cited study by the University of Tennessee says states, cities and counties nationwide lost $13.3 billion in revenue last year from uncollected e-commerce sales taxes.

That's about 3 percent of total sales tax revenues that year, a percentage projected to increase to 6 percent by 2006. For a handful of states, it could approach 12 percent by 2011.

Another study, for the Utah-based Institute for State Studies, predicted annual losses up to $45 billion by 2006. By that analysis, California last year lost $1.75 billion in revenues, while Texas and New York followed with about $1 billion each.

Obviously, no one wants to have to pay taxes on online purchases, but I suppose the free ride had to end eventually. Since it's doubtful that governments will continue to allow online transactions to go untaxed in the near future, what would be the best way to implement a tax for online purchases? Is a country-wide flat tax the best way to go, or should states be allowed to set their own taxes and force online retailers to sort through which taxes apply to which transactions?
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