Editorial: Use Tax Debate Is Far From Over

Use tax … the debate certainly isn't over, despite the fact that the Advisory Commission on Electronic Commerce issued its report to Congress last week recommending that companies shouldn't be required to collect sales taxes on items sold over the Internet.

This year, two states — Michigan and North Carolina — joined 10 others in an attempt to take the tax issue into their own hands: They added a specific line item to their income tax forms to get residents to 'fess up about what they buy through catalogs and the Internet. With Net sales expected to top $100 billion by 2003, these states are eyeing the use tax as a way to make up for lost revenue.

The Associated Press reported last week that Michigan's efforts have paid off — a little. The state estimates that it loses $200 million to catalog and Internet sales each year. So far, 21,000 taxpayers have filed tax returns showing they owe money for the use tax, which compares to 5,500 the previous two years combined. Whether more states decide that this is the answer remains to be seen. Republican Gov. James Gilmore of Virginia, who is chairman of the 19-member ACEC, is talking about abolishing his state's use tax. Why? Of 11,500 who paid use taxes last year — of 2.9 million tax forms filed, only $1 million in revenue was brought in out of $9.3 billion. Meanwhile, USA Today posed a question to its online readers last week: Would you make fewer Internet purchases if states impose use taxes in place of sales taxes? Seventy-three percent said yes, and nearly 15 percent said it would depend on the amount of the taxes. Clearly, the fact that catalogers and Internet merchants don't have to charge sales tax is a key factor in higher sales.

In all of this talk of no new taxes on the Internet, the use tax keeps being ignored: While the Internet Tax Freedom Act of 1998 may stop states from collecting new Net taxes, it doesn't prohibit collecting taxes that currently exist. So if you're living in one of those states that have added use tax to their tax forms, you may be committing perjury if you mark in zero and sign the return. Credit card bills will lead an easy trail back to the sites where the goods were purchased.

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