The growing role of e-commerce raises many policy issues, including privacy and consumer rights. The concern addressed by this paper is whether state and local sales taxes should be applied to e-commerce.

Currently, 45 states impose sales/use taxes. The sales tax provides about 25 percent, on average, of state and local tax revenues. These taxes go uncollected on many Internet and catalogue sales, however. This is because the Supreme Court has placed limits on the states' ability to require certain out-of-state merchants to collect the tax. Moreover, consumers have failed, by and large, to carry out their legal responsibility to submit the sales tax to their home states, although all states that collect the sales tax require their citizens to do so when the retailer has not already collected the tax.

As a result, under the existing system of laws related to the sales tax, identical products may be taxed differently, depending on whether they are purchased over the Internet, through a catalogue, or in a traditional, "mortar-and-bricks" store. Traditional retailers charge that this situation confers a price advantage on catalogue and Internet retailers.

In addition, an important equity concern arises from the fact that older people, minorities, and people with lower incomes are likely to pay the sales tax more frequently than other individuals, because they face certain barriers to Internet shopping. These groups are less likely to have Internet access, credit cards, or a secure place to receive goods delivered through the mails.

State governments are concerned that their financial situation will suffer as a result of untaxed Internet commerce. This could imperil the many state-provided services to seniors and low-income residents. Eventually, states might be forced to seek additional revenues from the property tax, which weighs more heavily on seniors.

Many arguments have been levied against the existing sales tax system. Some of the criticisms are unjustified, for example the charge that the sales tax amounts to "taxation without representation." Other criticisms are of dubious merit, such as the argument that the Internet is an "infant industry" that must be protected in order to allow it to develop.

Probably the strongest argument to be made against applying state sales and use taxes to the Internet is that the administrative burden could overwhelm small retailers. It is often argued that the sales tax places an onerous burden on both catalogue and Internet firms, because it requires them to collect the tax under vastly different state sales tax regimes. Currently, the compliance burden facing an Internet or catalogue firm that is required to collect the sales tax in 46 jurisdictions, because it has a physical presence in each of those jurisdictions, is no different from the compliance burden facing a national retail chain with stores in each of those jurisdictions. Under current law, the very smallest Internet retailers, those run out of households, only have to collect the sales tax on sales within their home state. But efforts to expand merchants' duty to collect the sales tax have the potential to affect even the very smallest household firms. For this reason, most proposals to expand the duty to collect the sales tax contain de minimus thresholds.