The current growth and future explosion of "e-commerce" (electronic sales of goods and services via the Internet) is a critical element in the development of the New Economy. E-commerce gives consumers greater choice and more competitive prices. It will help produce a breakthrough in the number of Americans who find it useful to go online, and have enormous implications for the "digitization" of daily life.

But e-commerce is also threatening to reduce state and local tax revenues, creating a dilemma for policymakers. On the one hand, state and local regulation of e-commerce--and even more, regulation of Internet access--could inhibit the development of the digital economy. On the other hand, the migration of sales from face-to-face transactions to remote media--including not only e-commerce but telephone and mail-order sales--is eroding the revenue base that finances public schools, policing, infrastructure for economic development, and other critical services.

Recognizing this problem, Congress last year enacted the Internet Tax Freedom Act, which imposed a moratorium on taxation of e-commerce until 2001, and established a commission to make recommendations on its future development. The commission met this past week in New York and amidst a flurry of activity on both sides agreed to solicit tax proposals from state tax officials and other groups. But the heated deliberations are in danger of degenerating into a dialogue of the deaf between those who fear sales taxes will kill e-commerce, and those who fear e- commerce will kill state and local governments.

Fortunately, as Rob Atkinson and Randolph Court explain in the new PPI paper released last week, "Internet Taxation, A Software Solution," there is a "third way" available: the development and dissemination of computer software that can make fair taxation of the Internet and other remote sales easy and efficient.

The software, which should be available for free downloading by retailers, would immediately identify tax rates by the address of the buyer, and would electronically remit sales taxes owed to the proper jurisdiction, at the click of a mouse. If publicly promoted--i.e., by the Federation of Tax Administrators--this software would become available almost instantly. Furthermore, it could be offered to catalog and phone-sale retailers who are also currently outside the normal pattern of sales taxation.

This last point reinforces the need for Congressional action to make taxation of all remote sales fair and rational. Under current law, states and localities can tax mail-order or phone sales only if the seller has retail outlets within their jurisdiction, on the theory that the "point of sale" is the seller's location, however remote. "Virtual sales" on the Internet are making this "point of sale" doctrine increasingly archaic, and unfair. It's time to shift to a system where the "point of sale" is the buyer's location, not the seller's, no matter how the sale is conducted, by Internet, phone, mail or in person. The "software solution" makes that shift possible.

Some libertarians oppose this approach on grounds that e-commerce creates a tax-free paradise. They are happy, not worried, that a shift toward virtual points-of-sale will make it impossible for states and localities to tax transactions. A recent letter from a group of Congressional Republicans to the commission on e-commerce taxation essentially adopts this posture, on grounds that making it easier to tax electronic sales represents a "tax increase."

This argument is disingenuous at best. Maintaining the ability to tax commercial transactions wherever they occur hardly represents a "tax increase." And celebrating the erosion of a major state and local revenue source only makes sense if you are willing to identify alternative sources, or specifically recommend radical spending decreases. Conservative opponents of taxing of remote sales are not willing to do either.

Let technology create a level playing field for all sales and make commerce more convenient and efficient for sellers and buyers alike.