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With rapidly changing technology, especially information technology and computer software, electronic commerce is growing dramatically and reshaping traditional sales market. On-line purchasing makes borders more and more meaningless and thus threatens state and local tax jurisdiction. Currently 45 states and the District of Columbia are heavily reliant on sales and use taxes as their main revenue sources.

The purpose of this report is to analyze increasing electronic commerce, to develop the future enactment for workable taxation, and provide its policy implications for state and local revenue. Given this purpose, the report begins with a discussion of the general background of electronic commerce and state and local sales and use taxation. The recent three-year moratorium for imposing new taxes on Internet commerce under the Internet Tax Freedom Act, highlights the significance of electronic commerce over the Internet for the future economy. In addition, those discussions revisited controversial nexus standards and simplification issues. The overlap of state and local tax jurisdictions exacerbates this complexity causing high compliance costs, especially for small businesses.

The controversial debate about whether or not to tax electronic commerce is mainly divided between the e-commerce industry and state and local government. This debate is not new. The Willis Committee from 1961 to 1965, which studied all concerns regarding taxation of interstate transactions such as mail order, provided valuable lessons for balance between simplification issues and limitation of tax jurisdictions. Based on those experiences, I argue that state and local government should simplify complicated tax structures. These structural issues should be settled prior to any legislative change of nexus standards. This is a cornerstone for workable taxation. As for state and local revenue erosion, it is minimal now, but rapidly growing electronic commerce will significantly impact these revenues in the near future.

This report concludes by providing recommendations in relation to the development of electronic commerce and state and local revenue. These policy recommendations include:

• Simplify complicated sales and use tax structures. Without simplification, the current nexus standards or the requirement of substantive physical presence should be maintained. For an innovative simplification, a third party may be in charge of tax collection and remittance to the customer state.

• Achieve tax fairness. Tax fairness is dealing with sales taxes equally regardless of purchase methods such as "bricks-and-mortar" sales, the Internet, mail order and phone purchase.

• Provide incentives to remote sellers. Remote vendors are in less preferable tax status than in-state vendors. Tax incentives such as tax compensation or discount will reduce their tax compliance cost and potential tax evasion.

• Fill the information gap between Œhaves¹ and Œhave-nots.¹ State and local governments place less emphasis on reducing digital divide, than does the federal government. Therefore, more effort in state and local government is needed to provide digital opportunities to lower income households.

• Cooperate not only with business firms but also between state and local governments. The simplification of tax rate and tax base can not be achieved without cooperative win-win efforts.