This article examines the relationship between electronic commerce and the U.S. state sales and use tax system. A framework is used in this study of a high-quality tax system and it is applied to taxing electronic commerce sales. The first part of this article analyzed nine principles of an effective tax system, and divided these principles into the categories of adequacy of revenue, fairness of revenue, and management of revenue. In the second part of this article, these principles are tested to determine what impact electronic commerce taxation has on an effective revenue system. The results of these initial tests suggest that taxation of electronic commerce was associated with fairness in the tax system. In particular, the results suggested that states that had fairer tax systems were more likely to rely less on a sales tax and more on taxing Internet access. Management and adequacy of the revenue systems of states were not found to have a significant bearing on taxing electronic commerce. These results reinforce the existing public finance and legal theories which argue that the sales tax is not a fair revenue stream, and it should be re-evaluated especially in light of the contentious issue of taxing electronic commerce.
Indexing the Federal Tax System: A Cost-of-Living Approach