Clinton opposes sales tax on Internet shopping

PRESIDENT Bill Clinton yesterday came out on the side of the angels of technological progress and the free market in an increasingly bitter tussle between individual states and United States business, big and small. At issue is whether the growing number of Americans who buy goods over the Internet should be liable to pay sales tax on their purchases and if so, to whom.

Speaking in San Francisco, within shouting distance of "Silicon Valley", Mr Clinton called for a moratorium on all new taxation of goods and services sold over the Internet, and said it should apply to all taxes, federal, state or local. His reasoning was that nothing should be done to stifle the development of electronic commerce, which is still in its infancy.

This was Mr Clinton's first pronouncement on a subject that has insinuated itself almost unnoticed on to the legislative agenda, but has huge implications in terms of money and principles. Taken to its logical conclusion, Internet commerce not only poses questions about the highly devolved tax system, but also threatens the balance between the rights of states and the rights of the federal authorities.

Americans with access to the Internet - 20 million and growing - can buy an ever wider range of goods electronically. Initial reluctance to use the services, largely because of fear about credit card confidentiality, has faded, and the sector is seen as one of the biggest areas of potential growth.

A combination of factors makes the US particularly fertile ground for Internet shopping. People in rural areas have traditionally relied on mail order to obtain clothes and luxuries, and computers make it easier to compare prices. Then there is tax. States are allowed to impose a sales tax, and most do; this is added at the till and the rate varies from state to state. Sales via the Internet, however, are currently exempt, because the states cannot agree on who should levy the tax and how.

Late last year, a group of states banded together to propose reciprocal taxation on mail-order sales that would also apply to the Internet. This was abandoned after lobbying from business and consumers. This week, the subject came up again: the call for a tax on Internet sales was number one on the agenda of the twice-yearly state governors' meeting in Washington.

Legislation about to go before Congress would provide for a six-year moratorium on Internet sales taxes. Mr Clinton's intervention makes the bill more likely to pass. However, the states will not give up without a struggle.