The question of Internet Taxation seems destined to be with us perpetually. The same policy errors and myths seem to reassert themselves periodically as state bureaucrats look for more revenue and petition Washington for a comprehensive approach rationalizing their own disparate sales tax schemes.

One of these myths is that State and local government do not have taxing authority over internet purchases. However, State and local governments always have been entitled to collect sales and use taxes based upon Internet transactions under the law.

State and local governments complain they have difficulty collecting taxes for transactions conducted over the Internet. The real issues facing states tax revenue agents are jurisdiction and taxpayer compliance.

State sales taxes depend upon jurisdiction for enforcement. States can enforce sales tax collection and impose payment responsibilities on sellers only to the extent such sellers have a nexus with the taxing authority. By way of example, the internet vendor in Minnesota is not subject to Florida sales tax enforcement because the vendor has no presence in the state of Florida.

This does not necessarily mean that Florida must forgo sales tax proceeds from transactions between the Minnesota vendor and the Florida resident. The Minnesota vendor is subject only to the jurisdiction of Minnesota and cannot be taxed by Florida. However, the Florida resident that purchases from the Minnesota vendor is subject to the jurisdiction of Florida and can be taxed.

Each state resident is responsible for payment of use taxes to the state taxing authority on applicable purchases, regardless of seller location. The system depends upon voluntary compliance and reporting from buyers that typically do not file use tax returns.

A second myth that seems perpetually with us is the notion that the Internet retailer has competitive pricing and market advantage because they do not collect taxes on sales for residents outside thier home state, which threatens traditional store traffic and local sales. These advocates support Internet taxation on the basis of fairness.

A few flaws can be found in the fairness argument. First, Internet vendors are subject to tax by the state taxing authorities where they are located. The notion that the Internet vendor is not subject to taxation is simply incorrect. Internet vendors are not subject to taxation in every jurisdiction in which they sell product. Of course, neither are main street retailers required to collect taxes for sales they conduct in foreign jurisdictions.

Advocates for imposing tax collection responsibilities on e-commerce vendors for transactions in foreign jurisdictions compromise the goal of fairness by forcing these vendors to pay taxes in jurisdictions where they receive no benefit. Taxes are for services rendered by government. The e-commerce vendor located outside the state receives no such services and, therefore, should not be taxed.

The logic of the middleman in this debate is curious. The more attractive proposal would seem to be that since the Internet vendor pays no tax, the competitive playing field is best leveled by allowing main street retailers to run their businesses tax-free.

To the extent the Internet vendor has an advantage over the traditional retailer, this advantage is not derived from escaping sales taxes. E-commerce vendors have an advantage because of the efficiencies of their business models. The vendors have no need for retail outlets, large inventories or a sales staff. Markets are not limited by geographic reach. These cost and marketing advantages loom large, regardless of the sales tax question. The best competitive response is to enter the market and compete, rather than throw up regulatory barriers to protect an eroding position. Most retailers now get this idea, but have had limited success actually transcending their traditional approaches....and costs.

Despite the irrationality of these myths, advocates for additional internet regulation seem to still be with us. Escaping the burden of additional taxation requires that the industry be diligent in advocating for a tax nuetral internet economy.