Sunday, June 05, 2005


[Revised June 6]

Detractors of economist and NYT columnist Krugman claim that he made a howler in a February 2000 op-ed piece (, in which he criticized Senator John McCain for wanting to exempt internet commerce from sales tax which brick-and-mortar establishments have to pay. They jump on the following statement, from that essay:

Right now, if you buy a book at your local bookstore, you probably pay sales tax. If you order it from, you don't. This unequal treatment is largely due to administrative issues: state and local governments haven't yet figured out how to collect taxes on catalog shopping, let alone e-commerce. But there is also a legal impediment: the Internet Tax Freedom Act of 1998, of which John McCain was a chief sponsor, imposed a three-year moratorium on Internet taxes. And Mr. McCain is the only presidential contender promising to make that moratorium permanent.
End quote.

For instance, has the following:

Begin quote:

Internet sales taxes: Krugman lectures us that the Internet Tax Freedom Act (ITFA) will repeal sales taxes on Internet retailers such as, while leaving such taxes in place on store-based retail sales. And since this unequal treatment obviously is both unjust and economically inefficient, John McCain is either "confused" or "pandering" in sponsoring such right-wing Republican legislation.

Reality: The ITFA had nothing at all to do with sales taxes -- zip, nada, nil -- leaving Amazon's sales tax bill reduced by exactly $0.00 to this day. And it was so right-wing that it passed the Senate by a vote of 96-2 ... indicating it had the support of a whole lot of confused, pandering Democrats."

End quote.

Firstly, Krugman doesn't say that the ITFA repeals sales taxes on Internet retailers, he says that it puts a moratorium on imposing any taxes.

Secondly, the authors of the above seem to have completely missed is that in September 1999, John McCain introduced new legislation which not only makes the three year moratorium on taxes imposed by ITFA in 1998 permanent, but also " would also ban sales and use taxes on electronic commerce." (e.g., see )

Thirdly, the critics like to point out that the ITFA does not prohibit sales taxes on the Internet, it merely prohibits discriminatory taxes - that is, no taxes above and beyond what any other business would pay when doing equivalent business. They point out that key section of the original ITFA read:

a) Moratorium.--No State or political subdivision thereof shall impose any of the following taxes during the period beginning on October 1, 1998, and ending 3 years after the date of the enactment of this Act--

(1) taxes on Internet access, unless such tax was generally imposed and actually enforced prior to October 1, 1998; and
(2) multiple or discriminatory taxes on electronic commerce.
End quote

Here it is worth looking up the debates in the Senate when the ITFA came up for passage. (Please use the Congressional Record search tool at if the URL below is broken.)
From the Congressional Record, S11691, October 7, 1998, this brief statement by Senator Wyden, one of the sponsors of the legistation, is quite clear:

Mr. WYDEN. I will be very brief, I say to the chairman and colleagues. The hour is late. All we seek to do is to have technological neutrality. We are not going to tax catalogs. We also don’t want to tax web sites. That is all this is about—
preventing that kind of discriminatory tax. I thank the chairman for yielding.

From the preceding debate we learn that the Congress has the authority to enable states to tax mail-catalog sales, but has never done so, with attempts to do so constantly being defeated. The sponsors of the ITFA, as shown above, believe that the moratorium on discriminatory taxes and the current no-sales-tax on mail catalog sales means that there will be no sales tax on e-commerce.

Assuming that the Senators knew what they were debating - a substantial leap of faith - it seems clear that Krugman was right - the ITFA of 1998 did pose a legal obstacle to states trying to impose regular sales taxes on e-commerce. Proposed amendments to explicitly allow sales taxes equal to that one would pay if one walked into a store were defeated during the passage of the legislation.

Fourthly, the Senate bill did go through with a 96-2 vote, but please note that another section of the bill another section of the bill is titled "TITLE IV--CHILDREN'S ONLINE PRIVACY PROTECTION". Catch a politician voting against protecting children from purveyors of pornography!