Excerpt from:  Sales and Use Taxation of Internet Sales

Proponents of the taxation of Internet sales argue that the states will lose a substantial amount of tax revenues in the future if Internet sales are not taxed.  A study conducted [13] in 2000 estimated that states would lose $2 billion on uncollected taxes in 2001, and more than $5 billion in 2004. [14]   Some states have put the expected losses at three times as much. [15]   Moody’s Investor Service estimates that states could miss out on $10 billion in sales-tax revenues by 2003. [16]   The General Accounting Office (GAO) estimated in June 2000 that state and local revenue losses from remote sales could be as much as $20 billion by 2003. [17]

Second, proponents of Internet sales and use taxation argue that it is unfair to require brick-and-mortar stores to collect and remit taxes for the same goods sold tax-free by Internet companies.  According to Peter Lowy, the founding chairman of the e-Fairness Coalition, a group of brick-and-mortar and online retailers, realtors, retail and real estate associations, and publicly and privately owned shopping centers, “the government should not provide preferential sales tax treatment based solely upon the distribution system used to sell goods.  Requiring brick and mortar retailers to collect sales taxes while exempting their online competitors is fundamentally unfair.” [18]  

Third, the absence of a sales or use tax on sales conducted over the Internet unfairly benefits higher-income Americans who can afford the personal computers that allow them to take advantage of online shopping.  According to United States Senator John Breaux, D-La., “it isn’t fair to residents who must pay the local sales tax because they don’t own a computer.” [19]

Opponents of the taxation of Internet sales, however, argue that sales conducted via the Internet should not be taxed because of their elemental role in the digital age and the new economy.  According to Governor Gray Davis of California, in support of his decision to veto an Internet sales and use taxation statute, “in order for the Internet to reach its full potential as a marketing medium and job creator, it must be given time to mature.  Imposing sales taxes on Internet transactions at this point in its young life would send the wrong signal about California’s international role as the incubator of the dot-com community.” [20]   Similarly, according to Massachusetts officials, imposing the burden of collecting sales taxes could hurt the technology industry, which is responsible for 185,000 jobs in Massachusetts. [21]   Thus, Massachusetts is one of a few states that have refused to join other states in presenting a united front on the issue of Internet taxation. [22]   Three other leading technology states, Colorado, California, and Virginia, agree that taxing Internet commerce would hurt their local economies. [23]