MIDLAND- Should sales over the Internet be taxed? A clear majority of members of the Advisory Commission on Electronic Commerce, the congressional advisory panel assigned to examine the issue 10 months ago, recently said no. But that doesn't mean Congress can't ignore the panel and do what governors and mayors across the country—including Governor John Engler—are urging it to do: Apply sales taxes to the Internet.

As noted in a report released today by the Mackinac Center for Public Policy, Engler recently testified before Congress that it is "unfair" to subject sales of traditional businesses to taxation while exempting sales conducted over the Internet. While opposing any new Internet taxes, Engler endorses a plan advocated by the National Governors' Association, the National Association of Counties, and the U.S. Conference of Mayors that would apply existing sales taxes to all Internet purchases and create a "third-party entity" to collect and distribute those taxes.

But according to Mackinac Center President Lawrence Reed, author of Internet Purchases: To Tax Or Not To Tax, Here Are the Questions, this isn't just bad economic policy. "The Engler administration, while laudable in most respects, is no stranger to inconsistent or uneven tax policy. Michigan's tax structure is riddled with unfair, administration-sponsored `special favors'—even, in one case, for an Internet company."

Reed cites an example in which state officials authorized a $23.4-million "incentive" package for Webvan Group, Inc., of San Francisco, California, this past December. Webvan operates as an electronic grocery outlet, receiving orders over the Internet and delivering them at prices it advertises as "up to 5 percent less than in local grocery stores."

"This is just one of many examples in which the state of Michigan engages in unequal or `unfair' treatment of businesses, offering one business a tax break or other economic incentive, while other businesses must use their own resources to compete with the favored business," says Reed. "This is much more `unfair' than allowing businesses to sell over the Internet free from sales taxes, since selling over the Internet is open to all businesses on an equal basis."

Reed says one reason state and local coffers are "awash" in budget surpluses, is because our current healthy economy is being fueled by Internet companies, Internet sales, and the related explosion in technological innovations in communications. He notes a recent study by economists at the University of Chicago and Harvard University estimating that applying sales taxes to electronic commerce would reduce the number of online buyers by 25 percent and total spending on Internet transactions by more than 30 percent. The study suggests that these sales would not be replaced by ordinary retail sales, since the Internet is probably a net trade creator, generating business that would not otherwise have occurred.

Reed noted that former Michigan treasurer Bob Bowman suggested that Governor Engler's high-profile call for taxing Internet purchases may be reinforcing negative impressions of Michigan's improving tax climate. "The Governor could turn that around if he announced he had a change of heart and was endorsing the commission's majority opinion to extend the moratorium on Internet taxation," Reed says.

"The Internet represents a new world of enterprise, increasingly easy for both buyers and sellers to access," Reed says. "Rather than killing—or crippling—the goose that's laying the golden eggs, politicians should see it as a means to a more promising future for everyone."

In To Tax Or Not To Tax, Reed takes a complex public-policy issue and presents it in an easily understandable question-and-answer format easily accessible to the layman. His conclusion: "The real reason state and local governments want to tax the Internet is because they can't bear to sit idly and watch a huge cash cow pass them by."