US States' Fiscal Problems Threaten Internet Tax Freedom

by Mike Godfrey, Tax-News.com, Washington

25 June 2002

The downturn in certain sectors of the US economy has been affecting the states' tax collection for two years now, and many are caught between declining revenues and mandatory expenditure which leaves them strapped for cash and hungrily eyeing the Internet as a source of potential revenue.

According to a report in MoneyNews.com, a growing fiscal crisis among the states is causing some to default on refund payments due to individual and corporate taxpayers.

Missouri is reported to have told 415,500 taxpayers that their refund checks are 'on indefinite hold', with the state hanging on to $167 million due to taxpayers. Alabama is also reneging on their tax-refund obligations and is refusing to send refunds owed to corporation that have overpaid their taxes.

Although the transfer of trading on-line has affected only a small minority of transactions so far, it has a disproportionate effect on states' revenues, since they are highly dependent on sales tax income. Internet transactions are free of sales tax under the Federal moratorium law, which was extended for a further two years last fall. If the states' financing crisis doesn't ease in the next year, expect many of them to resist any further extension of the moratorium, and to lobby hard for sales taxes to be extended to the Internet.

Up to a point, the states' problems are also good news for the SSTP (Streamlined Sales Tax Program), which is making steady if unspectacular progress towards a unified sales tax regime - seen by many as a necessary precursor to an Internet sales tax.

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