Electronic Commerce and the State Sales Tax System: An Issue of Tax Fairness

This article examines the relationship between electronic commerce and the U.S. state sales and use tax system. A framework of a high-quality tax system is used in this study, and it is applied to taxing electronic commerce sales. The first part of this article analyzes nine principles of an effective tax system and divides these principles into the categories of adequacy of revenue, fairness of revenue, and management of revenue. In the second part of this article, these principles are tested to determine what impact electronic commerce taxation has on an effective revenue system. The results of these initial tests suggest that taxation of electronic commerce was associated with fairness in the tax system. In particular, the results suggested that states that had fairer tax systems were more likely to rely less on a sales tax and more on taxing Internet access. Management and adequacy of the revenue systems of states were not found to have a significant bearing on taxing electronic commerce. These results reinforce the existing public finance and legal theories that argue that the sales tax is not a fair revenue stream and that it should be reevaluated, especially in light of the contentious issue of taxing electronic commerce.