Alaska's state on Internet taxation

The new economy

Posted: Friday, March 31, 2000

Later this month Congress will hear an important report from the Internet Tax Commission. The issue is whether sales on the Internet should be subject to taxation. Alaska has no sales tax, but we may be more affected by these discussions than most other states.

Here are the issues: Under current law, mail order and Internet retailers are required to collect sales taxes on goods sold to customers in those states in which the seller has a physical presence. For example, is headquartered in Washington state and has warehouses in several states around the country. Thus, when a person in Washington or one of those states with an warehouse buys a book online, they should be charged the appropriate state and local sales taxes. But some mail order and Internet sellers refuse to collect sales taxes. If the seller does not charge the tax, the law requires the customer to pay a ``use tax'' to the state.

Not surprisingly, compliance with the use tax is almost nonexistent because it is so difficult to monitor Internet and mail order transactions. Traditional ``brick-and-mortar'' businesses think it is unfair that mail order and Internet sales go untaxed and have been pressing Congress to change the laws. And it is not only businesses that are being hurt, so are state and local governments. Sales tax revenues account for about a third of a revenues in the 45 states that collect them. By one estimate, lost sales tax revenue from mail order and Internet sales could total $10 billion by 2003. This will force many states to cut spending unless lost revenues can be made up elsewhere.

The National Governors' Association is trying to develop workable methods for taxing Internet transactions. One proposal would make existing credit card networks responsible for collecting Internet sales taxes. Of course, not all state governors belong to the National Governor's Association or favor taxing the Internet. As you might guess, the governors of many states with a large high tech presence are opposed to taxing Internet transactions.

Another problem relates to income distribution. The Internet is creating a large and growing ``digital divide'' between the rich and the poor. Households with incomes over $75,000 are almost eight times as likely to have Internet access as households with incomes between $10,000 and $15,000. This means that it will be easier for rich people to avoid sales taxes as long as most Internet transactions go untaxed.

Some economists believe that it will soon be impossible to collect sales taxes at all because even traditional businesses will be able to avoid taxes. For example, retailers could install computer terminals in their stores and invite customers to input their orders to a different location and thus avoid paying taxes. Others believe that even if we could charge taxes on Internet purchases, that it would be unwise to do so. The Internet, they argue, is the greatest jobs-creating vehicle in the New Economy and taxing it would only hurt the economy.

The Internet tax question affects Alaska in some important ways. First, as a response to our ever-present budget crisis, we repeatedly hear calls for a state sales tax. This may have made more sense a couple of decades ago than it does today because Alaskans now buy so many goods through mail order and the Internet. And because access to the Internet is so expensive or restricted in many Alaskan communities, the income distribution consequences of the digital divide could be especially severe in Alaska. Those of us who live in Juneau, Anchorage and Fairbanks could use the Internet and avoid paying state sales taxes; Alaskans who live in Bush communities may not be able to. Only if an Internet tax is implemented would these problems be lessened.

But Alaska does have a budget problem, at least as long as the Permanent Fund is off limits. If we must rule out a sales tax, is an income tax the only remaining option? Perhaps not. The U.S. Chamber of Commerce and other groups are working on innovative new tax strategies which would replace the sales tax. But until one of these innovative programs is actually enacted, Alaska would do well to bite the state income tax bullet.

Bill Brown teaches economics at the University of Alaska Southeast. He can be reached at

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