The Sales Tax and Electronic Commerce: So What's New?

This paper takes a pragmatic look at the appropriate sales tax policy for the Information Highway, composed of Internet/on-line service providers, content, hardware/software, and telecommunications transmission. Our general conclusion is that the sales tax should be designed to be largely consistent with the current structure. At the same time, we argue for a more inclusive approach to taxing final sales and a more liberal treatment of business input purchases. Specifically, we argue for destination-based taxes; an economic concept of nexus preferably enabled through Congressional action; a direct use rule for exemption of business purchases; and the enumeration of nontaxable as opposed to taxable transactions. Neutrality should be enhanced by taxing similarly all functionally equivalent activities.