By Catherine Hubbard, CCH Washington Staff Writer

State and local sales tax systems that fail to tax sales of goods sold via the Internet could create a disproportionate tax burden on businesses that sell most of their goods over the counter, a panel of experts warned on November 17. In addition, one panelist said Internet sales tax compliance would be more difficult for smaller businesses than for larger firms, which have adequate staffs to handle the workload involved.

Electronic commerce, of which a large part is sales over the Internet, has risen steadily from $350 million in 1995 to a projected $1 to $2 trillion by 2002, according to Frank Shafroth, director of state-federal relations at the National League of Cities, Washington. States rely on sales taxes for 49 percent of their revenue, while 21 percent of cities' revenues come from these taxes, Shafroth said, adding that states and localities fear that as sales move increasingly to the Internet, revenues from sales taxes will diminish. He spoke at a seminar sponsored by George Washington University's Cyberspace Policy Institute.

The Omnibus Budget Reconciliation Act of 1998 included provisions that impose a three-year moratorium on taxes on Internet access charges and protect against new Internet-specific levies such as bit taxes, web-search taxes and e-mail surcharges. However, the bill does not address the problem of how states can tax Internet sales.

States and localities for years have been dealing with the challenge of collecting sales taxes from catalog sales that cross jurisdictions. Taxing goods sold via the Internet presents the same problems, but on a larger scale, Shafroth said. He added that, since sales taxes largely are unavoidable for standard over-the-counter sales, companies selling goods and services over the Internet could be at a competitive advantage.

Jeffrey Matsuura, attorney with the Enterprise Law Group, Inc., Menlo Park, Calif., said smaller firms will be hardest hit by taxes on sales made through the Internet, since small firms often do not have the staff to manage tax payments in multiple jurisdictions. Thus, larger firms that already are able to collect sales taxes in jurisdictions throughout the country will better be able to handle Internet sales tax collection, he said.

Also at the seminar, Pris Regan, professor at George Mason University, Fairfax, Va., said states may need to develop new sales tax laws that translate current laws to the online world. One goal of states and localities is to create sales tax laws that do not place an unfair burden on firms that compete with businesses that sell through the Internet, she said. Regan noted that state and local governments will need to consider the effect of their laws on companies that sell goods and services exclusively through the Internet, businesses that do not sell goods through the Internet, and those that sell both over the counter and through the Internet.

States might find they require more information from consumers of goods and services sold over the Internet in order to collect the appropriate taxes, Regan said. But she warned that, if consumers find increased requests for private information cumbersome or intrusive, they might become discouraged from making purchases through Internet web pages.