This article examines the relationship between electronic commerce and the U.S. state sales and use tax system. A framework of a high-quality tax system is used in this study, and it is applied to taxing electronic commerce sales. The first part of this article analyzes nine principles of an effective tax system and divides these principles into the categories of adequacy of revenue, fairness of revenue, and management of revenue. In the second part of this article, these principles are tested to determine what impact electronic commerce taxation has on an effective revenue system. The results of these initial tests suggest that taxation of electronic commerce was associated with fairness in the tax system. In particular, the results suggested that states that had fairer tax systems were more likely to rely less on a sales tax and more on taxing Internet access. Management and adequacy of the revenue systems of states were not found to have a significant bearing on taxing electronic commerce. These results reinforce the existing public finance and legal theories that argue that the sales tax is not a fair revenue stream and that it should be reevaluated, especially in light of the contentious issue of taxing electronic commerce.
TopIntroduction
Taxing of electronic commerce is one of the most pressing tax policy issues that U.S. state governments face in the 21st century. This article examines how electronic commerce affects the sales tax system and its adherence to the standards of a high-quality tax system. This study uses several principles to devise measures of revenue capacity, or the ability of state governments to have a high degree of adequacy, fairness, and management in their revenue systems. Revenue capacity is different from tax capacity; the latter represents the ability of a government entity to finance its public services (Berry & Fording, 1997). Revenue capacity is broader, encompassing not just state revenue raising ability but also the management of the revenue system and equity issues.
This study attempts to discern how states deal with taxing electronic commerce, particularly if they have a high-quality revenue system. Specifically, areas such as taxing Internet access, having a state sales tax, taxing digital downloads, and participation in the Streamlined Sales Tax Project (SSTP) (an effort created by state governments to simplify and modernize sales and use tax collection and administration) are examined.
The study is notably different from existing empirical work, in that it examines how the taxing of electronic commerce affects revenue capacity. This article qualitatively applies nine principles of an effective tax system, dividing them into the categories of adequacy of revenues, fairness of revenues, and management of revenues to the taxation of electronic commerce. These three categories then are tested quantitatively to determine the impact that taxing electronic commerce has on revenue capacity. The key question is: For states that are less reliant on taxing electronic commerce sales, will they have higher levels of revenue capacity?