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Economic Advisor to a Local Company

This paper is addressed to discuss the positive and negative sides of internet sales taxation and provide the persuasive arguments in favor of implementing the internet sales tax in Arizona.

The question of internet taxation is a rather controversial issue as it touches the interests of sales tax dependent authorities versus jurisdictions less concerned with a small loss of potential budget revenues from e-commerce. Generally, the extent to which each state is affected may differ, though it is obvious that the exempt of huge internet retailers from sales tax is depriving states of revenue, which in some cases may be critical source for covering the budget gap. Today, e-retailing is not on the starting page of its development, but is on the peak of its growth. Thus, people make many purchases via internet from vendors without sales tax whereas mainstreet merchants are closing their doors at an alarming rate. According to research of A.Nellen (Nellen A. 20), the states are indeed hurt by the losses in revenues due to free internet trade as in some states the revenues from the sales tax constitute up to 50% of the budget. The seven states including California, Illinois, Arkansas and Connecticut, North Carolina, Rhode Island and New York have already adopted the bill in favor of e-commerce sales taxation. W. Perera mentions in his article (Perera W. 22), that New York was the first state to implement internet collection legislation and successfully generated $116 million in additional revenues in two years. Moreover, the roots of the problem lie in much broader economic issue. Requiring big-box retailers to collect sales taxes while exempting their “internet” competitors is cardinally unfair as it provides preferential treatment for the business based solely on the distribution system of goods. Thus, this neglects the concept of equal opportunities and free market, where each seller is a "price-taker" rather than a "price-maker".

The opponents of passing the internet sales tax law suggest two explanations of their position. First and for most, such enforcement is unconstitutional as it neglects the series of U.S. Supreme Court decisions including the case of Quill v. North Dakota. The justices ruled that state can constitutionally make a remote (out-of-state) vendor collect sales tax only if it has a “nexus” or physical presence (like affiliations) in the state. To avoid this problem, the new explanation would establish that presence. The physical presence may be set when sellers have an allied company running in particular state or when vendors pay some percent as rent or commission to other sites in particular state, known as affiliates, which refer buyers.  Another argument is that sales-tax burden will be complex and fall disproportionately on small online businesses whereas their customers would have an additional income tax. Overall, the development of e-retailing challenged the U.S. taxation system, and it is a time to improve and change the laws, even though the amendments are complex and difficult.

To conclude, it is important to mention, that Supreme Court’s decision in particular field is now a subject to Congress’ amendments. Generally, paying rather than evading tax obligations would lessen the burden of paying for education, transportation, medical care per tax payer. Thus, an implementing of the “fair rules” for business would benefit the market players, the customers as citizens of the states, and the budget. Taking into account the above considerations, it is essential that Arizona join the team of “internet sales tax group” and assist in further implementation of the law on a federal level. 

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