A Fair Shake in the Digital Economy

The electronic marketplace is changing the way America shops. Today, a consumer or business can make a purchase with a keystroke. This innovation is exciting, dramatic and powerful, and it already has reshaped America and its economy. But electronic commerce also has implications for our traditional concepts of fairness. Most importantly, it presents serious challenges to our existing sources of revenue for schools, roads and public safety.

Online business has produced one-third of the growth in the U.S. economy over the past five years. Yet this is only the beginning. Consumers in 1998 purchased $8 billion in goods electronically, a figure projected to jump as much as 400 percent over the next two years. Business-to-business purchases will climb even faster, from $15.6 billion to $175 billion annually by 2000. Prospects of better price comparison, more choices and greater convenience promise one of the most profound changes in our economic history.

But e-commerce will produce other changes that will affect all of us. The more consumers and businesses shop on the Internet, the less they will shop at malls or on Main Street. It will affect the bottom line of many businesses as well as the ability of cities, counties and states to provide education, public safety and other civic infrastructures.

Why? Because under the Internet Tax Freedom Act passed by Congress and signed into law by President Clinton last October, goods and services sold over the Internet are not taxed the same as they are at a store.

Should an online seller enjoy tax privileges unavailable to a local merchant? For shopping mall and Main Street merchants, this is an underhanded attack designed to lure away their customers. If retail is being revolutionized, what should the rules be?

These questions are at the heart of a debate under way in Congress, where online vendors are engaged in an all-out campaign to avoid state and local sales taxes. For the cities and states that will lose billions of dollars in tax revenues, this means choosing between raising taxes or cutting public services.

Online vendors usually argue that exempting e-commerce from state and local taxation will enable the Internet to grow and flourish. But it does so at the expense of state and local taxing authorities as well as traditional competitors. If these vendors succeed during the next two years, everyone else will be stuck paying their tab.

What can be done to assure fairness in the marketplace and simplicity in terms of tax policy? The National League of Cities (NLC) has been working with governors, state legislators, business leaders, tax administrators, retailers, consumers and representatives of the computer and telecommunications industry to achieve a sensible solution.

Uniform tax rates, statewide revenue centers and exemptions for very small businesses may reduce sales tax collection burdens. Treating e-commerce, telephone orders and catalog mail-order purchases the same as over-the-counter sales will restore a level playing field.

But federal legislation is needed to accomplish this objective. Unfortunately, Congress appears to be heavily aligned with the Internet vendors.

Steamrolling states, cities and local businesses with special interest legislation favoring Internet vendors could prove destructive to a well-established local tax system that supports essential services and activities.

Taxes provide police and fire protection, safe neighborhoods, quality schools, well-paved roads, attractive parks and recreation facilities, good libraries, clean water and an overall quality of life that sustains a healthy local economy.

Our tax structure should work the same for everyone, or some will bear a heavier burden to offset the exemptions given to others. Local merchants should not have their livelihood imperiled by an arbitrary tax preference for e-commerce.

If our national policy leaders want to ensure a healthy economic climate for all businesses to compete on a level field, they should take the approach advocated by NLC for an efficient, fair and equitable tax structure for all the buyers and sellers doing business in our community.

Mary Poss is mayor pro tem for Dallas and a National League of Cities board member.