Internet pioneer William T. Schrader thinks he sees the future for state and municipal sales taxes sometime in the next decade, when e-commerce really takes hold.
His prediction: They're goners.
Schrader, founder and chairman of PSINet Inc. in Herndon, a leading Internet access provider, argues that it is fundamentally impossible to collect sales taxes on elusive Web commerce transactions.
When those transactions get big enough to matter, he contends, there will be an irresistible demand to eliminate sales taxes altogether, to be fair to brick-and-mortar merchants who must pay them.
"Where's the buyer [on the Internet]? The buyer's in the ether. There's no way to track the buyer," Schrader said in an interview. "The location of the purchase could be a Web site in Canada. The actual product could be shipped from Brazil and delivered to a warehouse in France. Who wants to tax that? Can't be done. It won't be done. . . . The sales tax is over. If you don't like that, get a grip."
The clarity of Schrader's crystal ball remains to be seen, and it may be quite a while before e-commerce calls the tune on retail taxes. Online purchases during the November-December holiday season may total $6 billion, according to Jupiter Communications, double last year's estimate, but that's still just 1 percent of the expected retail total nationwide.
But the debate over the e-taxes has been joined, most directly at the Advisory Commission on Electronic Commerce, a congressionally appointed panel headed by Virginia Gov. James S. Gilmore III (R) (visit its Web site at www.ecommercecommission.org/).
The sharp divisions over the issue were obvious at its most recent public hearing, in San Francisco last week.
Gilmore and some anti-tax proponents want the commission to recommend keeping the Internet free of sales taxes, to avoid crimping a cornerstone of the new economy, they say. The commission's recommendations are to be issued early next year.
The idea petrifies a coalition of state and local officials who testified before the commission Wednesday. "If you say no to sales taxes, you are saying yes to higher income and property taxes," said Randy Johnson, head of the Hennepin County, Minn., Board of Commissioners. "Government can't run on an empty tank."
Any serious shrinkage of state and local governments' sales taxes would indeed leave a gaping hole in their budgets. The District now depends on sales and use taxes for 23 percent of its total tax receipts. Maryland's dependence is 27 percent and Virginia's is 22 percent (including state taxes earmarked for transportation).
Options for offsetting a drop in sales-tax revenue are poor, says Carol O'Cleireacain, visiting fellow at Brookings Institution and a former New York City finance commissioner.
"You could have a major problem at the state level," she said. States would have to find new revenue sources or accept major reductions in programs -- which is exactly the result that anti-tax proponents like the Heritage Foundation want to see.
States could try to impose some kind of property tax, O'Cleireacain said, but that's something most states have left to localities. "You'd have real problems -- politically and legally -- trying to do that." Property-tax revenue doesn't keep pace with a growing economy anyway, because of delays in assessments.
"States would have to go in the direction of an income tax, which is right up there with Sodom and Gomorrah with some people," she said.
O'Cleireacain concludes that states will have to solve this problem themselves, without relying on Congress. "They're going to have to find a way of collecting sales taxes on the Internet. They will either survive together, or they'll be sliced apart," she said. And they'll probably need to strike an alliance with major retailers.
"This is a very important issue for [the states]," she said. "It will be a real, live threat, not a theoretical issue. You can hear it knocking on the door."
Sources of Tax Revenue
About a quarter of the money collected in the District, Maryland and Virginia comes from retail tax.
State and D.C. tax receipts, in millions of dollars
Sales, use tax All other taxes
Washington, D.C.* 23% ($650 million) 77% ($2.2 billion)
Maryland* 27% ($2.3 billion) 73% ($6.2 billion)
Virginia** 22% ($2.24 billion) 78% ($7.8 billion)
** Includes taxes earmarked for transportation; excludes local sales tax share.
SOURCES: D.C. and state tax agencies