Evaluating the Costs and Benefits of Taxing Internet Commerce

Current tax law makes it difficult to enforce sales taxes on most Internet commerce and has generated considerable policy debate. In this paper we analyze the costs and benefits of enforcing such taxes including revenue losses, competition with retail, externalities, distribution, and compliance costs. The results suggest that the costs of not enforcing taxes are somewhat modest and will remain so for several years. At the same time, compliance costs and the benefits of nurturing the Internet diminish over time. When tax costs and benefits take this form, a moratorium provides a natural compromise.