This essay analyses the economic effects of the Internet Tax Nondiscrimination Act, recently passed by the 108th Congress and explains why the U.S. government makes a permanent ban on taxing Internet connections (including Internet commerce). Finally, it discusses the elasticity of the tax on Internet commerce.
My essay will utilize the following economic principles: supply and demand, tax incidence, deadweight loss of taxation, tax distortions and elasticities. The essay will proceed in four sections. Section one will introduce the background of the Internet Tax Nondiscrimination Act. Section two will analyze the reason why a potential deadweight loss will emerge if the government enforces sales taxes on Internet commerce such as Internet sales. Section three will consider how the elasticity of demand affects the size of the deadweight loss. Section four includes closing remarks and summary.
Section One: Introduction.
Existing law governing sales tax treats goods sold over the Internet the same way it treats goods sold from catalog companies. Any enterprise without a physical presence in a state cannot be required to collect that state's sales tax even if the customer lives in the state. In this sense, the Internet is a virtually tax-free sales channel. Some opponents debated on this tax-free pattern that would cause a revenue loss of the government. In 1998, Congress passed the Internet Tax Freedom Act (ITFA) placing a three-year moratorium on new taxes on the Internet. Congress increased the moratorium on ITFA for another two years in 2001 to protect E-commerce from taxation. Two years later, on September 17 2003, the legislature made a permanent ban on taxing Internet connections (mostly concerning the Internet commerce).
Section Two: Deadweight loss of a new tax.
Sales taxes are, obviously, quite important to state and local government finance. Without Internet commerce sales taxes, they may suffer a big revenue loss.