In 1997, a small coalition met for the first time in Washington, DC, to discuss Internet taxation. As Thomas Santaniello, public policy manager for the Computing Technology Industry Association, recalls, "we could barely fill the room, interest was so small in the subject."
Fast forward to April 2000, the Cannon Caucus Room in the U.S. Capitol: The 11-month-old Advisory Commission on Electronic Commerce released its report and recommendations to Congress. "I was stunned-the room was packed," notes Santaniello. E-commerce retail sales had grown to $5.3 billion globally in the first quarter of 2000, according to figures from the U.S. Commerce Department.
Congress appointed the 19-member commission and forked over $1.4 million to study the e-commerce industry and answer key public-policy and taxation questions. For example, should online retailers have to collect sales tax in localities where they don't have a physical presence (or "nexus" in tax parlance)? Under present law (upheld by the Supreme Court in 1992), remote sellers via the Internet, catalogs, the telephone and TV aren't required to.
"The commission proposed that Congress "prohibit sales taxes on American consumers who purchase goods and services through interstate sales over the Internet by codifying clear 'nexus' rules."
The commission's roster of public and private figures included governors from Virginia, Utah and Washington; the chair of AT&T; the presidents of AOL and Time Warner; and MCI Worldcom's vice chair. Chaired by Virginia Governor James S. Gilmore (Virginia is home to more dotcom companies than almost any other state), the commission clearly favored the new economy. "Members of this commission have moved from a healthy e-tax debate to a responsible report that reflects the priorities of American taxpayers and consumers," Gilmore said.
They also proposed extending the 1998 "Internet Tax Freedom Act" for five years after its October 2001 expiration date. The act originally imposed a moratorium on new multiple and discretionary Internet taxes. The House passed the extension; the Senate is considering it. Industry observers think it maybe downgraded to an additional three-year moratorium. It's also been suggested that Congress permanently ban Internet access taxes.
"Congress is close to passing a couple of items from our report, but they're not close to settling the most controversial ones," says Stan Sokul, a commission member and an Internet industry consultant. One tax that might get the ax is the century-old 3 percent Federal Telecommunications Excise tax. A bill to repeal it passed the House in May and has moved to the Senate.
Ellen Paris is a Washington, DC, writer and former Forbes magazine staff writer.
The Tax Issue
The Internet taxation issue can get confusing because the real war is not really about new taxes, but rather the collection of existing sales and use taxes. State and local governments are loudly complaining about lost tax dollars from Internet sales.
"The states are involved because sales tax, on average, makes up 38 percent of a state's revenue. If you don't solve the Internet problem, you're deconstructing the sales tax premise," says Illinois state Sen. Steven J. Rauschenberger, co-chairman of the National Conference of State Legislators task force on e-commerce.
Not so, says Adam Thierer, a fellow at the Heritage Foundation, a public policy organization in Washington, DC. "State and local governments are running at all-time record surpluses," he says. "They're taking in more money than ever before."
The thorny issue is "use tax," which is similar to sales tax. Use taxes exist in 46 states. Consumers are expected to record their out-of-state purchases, then calculate and pay the tax they owe when they pay their state income tax. "The use tax has been out there all the time," says Debra Callihan, an associate professor at Virginia Polytechnic Institute and State University in Blacksburg, Virginia, who has recently taught on e-commerce taxation issues. "Its become a big issue because so many people buy online."
But few people know the tax exists-and even fewer pay it. In Utah, according to Rich McKeown, chief of staff to Governor Michael Leavitt, less than half of one percent of Utah taxpayers actually reported and paid use taxes last year. Because its virtually impossible to police use-tax compliance, state and local governments want Internet retailers to collect the use tax for them.
"They could put a tax agent at the end of every driveway to collect a use tax as the UPS man comes by," says Bob Bowman, 45, former Michigan state treasurer and CEO of Outpost.com, one of the oldest online retailers of consumer electronics and technology products. "Where we have nexus, we'll collect taxes, and where we don't, we shouldn't have the burden of collection."
Brick-And-Mortars Insist On Tax Equity
Many of the nation's large brick-and-mortar retailers are also crying foul. They insist that the tax-free Internet puts both them and smaller Main Street retailers at a competitive disadvantage.
"We don't support new taxes, but we support tax equity and equitable collection across distribution channels between brick-and-mortars and click-and-mortars," says Steve Pfister, senior vice president of government relations at the National Retail Federation. To lobby Congress, national retailers, shopping center owners and associations established the e-Fairness Coalition last November. In order to sell tax-free, several companies, such as Wal-Mart and Borders, have launched their own stand-alone dotcom operations.
In its 1999 National Main Street Trends Survey, the National Trust for Historic Preservation found that Internet usage was a key factor in small-business growth because it allowed for better service to local customers and augmented traditional store sales.
After all, convenience still seems to be the primary reason people shop online. "All the stores come to us," says Richard Hirsch, CEO of Richard-Marshall Fine Flooring Inc., a Los Angeles manufacturer of high-end hardwood flooring. "There's such a difference between buying online and buying in a store that not paying sales tax is just an added benefit." Last year, Hirsch's company spent about $500,000 buying computers, software and other items over the Net.
But according to Thierer, "The threat of the Internet killing the Main Street economy is greatly overblown."
Resolving The Tax Problem
Possible solutions to the tax issue are: leaving things status quo, requiring a flat national sales tax and streamlining state tax systems. "I believe the government should create a standardized tax system for the Net because it puts local businesses at a disadvantage," says Tom Somodi, 47, owner of IcanShopOnline.com, a virtual mall that targets the greater Milwaukee area.
Most everyone agrees that state tax structures need overhauling before any major tax changes are made. "This is a two-front war," says Pfister. "We want to see activity in the states because they need to simplify their tax structures, and at the same time. Congress needs to pass legislation to authorize the implementation of these changes."
What does it mean for netpreneurs? Not very much, according to Kent Johnson, KPMG's national partner of state and local tax solutions for e-commerce. "I can't see Internet sellers that don't have nexus having to collect taxes any time soon," he says. "I don't believe there's enough public or Congressional support."
Rob Marler, 32, and Brian Bangle, 30, co-founders of Maitland, Florida-based Directwireless.com, a site that sells wireless accessories, PDAs and paging services, point out that collecting taxes from out-of-state customers would force them to reduce prices. Bangle says, "We'd have to lower our profit margins to compete with normal retailers"
Don't expect any definitive action this year. William Nixon, former executive assistant to Senator William Roth, chairman of the Senate Finance Committee, says, "Internet taxation is a hot potato, and it's not something Congress wants to deal with in an election year. What will happen depends on who is in the White House next year and who wins Congress."
Mark Joyner, CEO of Aesop.com, a Los Angeles Internet marketing software company, understands. Joyner, 31, started an online petition to prevent Internet taxation. Nomorenettax.com has received more than 55,000 signatures to date. Joyner's ultimate goal is 500,000. "We'll e-mail our list and tell people to call their Congressperson and consider this issue during the next election," he says. Joyner certainly has the timing right: Historically, Congressional candidates seem to have better hearing just prior to an election.
To Collect Or Not To Collect
Internet taxation has two distinct sides. Here are a few more of the main players and where they stand:
- Utah Governor Michael Leavitt, chairman, National Governor's Association (he also served on the Advisory Commission on Electronic Commerce): "I [support] a level playing field, and if the states can't fix it, then we should scrap the sales tax and create fairness. But I think the federal government should keep out of the issue."
- Lisa Cowell, executive director of the e-Fairness Coalition: "We don't think the government should be in the business of picking winners and losers, and we think that tax law should be applied equally to all retailers."
- Senator Byron Dorgan (D-ND), proposed Internet legislation to define and simplify the collection of taxes from remote sellers: "It seems the solution is to require state and local governments to dramatically simplify things for the remote seller. When they have done that, then we can ask the remote seller to collect the tax, freeing the consumer from the burden of having to report it individually."
- Representative Christopher Cox (R-CA), co-sponsor of the bill to extend the Internet Tax Moratorium and co-author of the Internet Tax Freedom Act: "We cannot apply the tax policies developed for smokestack industries to the new economy."
- Grover Norquist, president of Americans for Tax Reform and a member of the Advisory Commission on Electronic Commerce: "It's transparently bad public policy to tax people in other states, and 70 years it hasn't been allowed."
- Senator Ron Wyden (D-OR), co-author of the Internet Tax Freedom Act: "Tax collectors have been trying to get around the Constitution to tax remote sales since Sears and Roebuck mailed its first catalog."
In Their Own Words
The presidential candidates on new Internet taxes:
Governor George W. Bush
"I applaud the House of Representatives for extending the moratorium on Internet taxation for five years. I also support a ban on all Internet access taxes."
Vice President Al Gore
"I supported the Internet Tax Freedom Act. I want to make our international 'cyberspace' a permanent 'duty-free zone.'"
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