Internet taxes: Stalemate as status quo

• By Thomas W. Bonnett
• Feb 04, 2001

Streamlined Sales Tax Project

With the 2000 election results leaving Congress evenly split between Democrats

and Republicans, the current stalemate on taxing electronic commerce is

likely to continue for some time.

Both major presidential candidates had supported extending the Internet

Tax Freedom Act of 1998, but not for as long as congressional leaders had

advocated.

While in Florida campaigning for the vice presidency, Sen. Joe Lieberman

(D-Conn.) said the Democratic ticket would resist imposing taxes on e-commerce

for the next two to five years. But he also said taxes would eventually

be levied on Web purchases. "It's not a question of if; it's a question

of when," Lieberman said. This was the first time a national politician

conceded what a handful of industry leaders have been saying for some time.

If taxing remote commerce is indeed inevitable, why not act now to establish

a fair, rational system? The full answer touches on several diverse topics:

technology (software to calculate tax rates by nine-digit ZIP codes is being

developed), case law (states do not have the authority to require remote

vendors to collect sales/use taxes), economics (computing and communications

industries are driving the U.S. economy) and politics (Congress is eager

to pre-empt state sales taxes on Internet access).

Last spring, the House voted 352-75 to extend the Internet Tax Freedom

Act for five years beyond its 2001 expiration. The Senate appeared ready

to follow suit until several prominent national retailers (and the National

Retail Federation) expressed strong opposition, and Sen. John McCain (R-Ariz.)

backed off. Most observers think the ITFA will be extended this spring,

but advocates for treating online sales the same as traditional shopping

will be seeking approval from the 107th Congress for a new tax-collection

system among the states.

The status quo presents two glaring inequities. Remote sellers are not

required to collect state and local sales/use taxes except where they have

a physical presence. National retailers, with a physical presence in almost

all states, must collect those taxes in all their stores and even when they

sell in other ways — via catalog, telephone or Internet.

The public sector would lose substantially greater tax revenues in the

future if retail e-commerce continues its exponential growth rate. Forrester

Research Inc. estimated last February that state and local governments lost

$525 million in 1999 tax revenues from Internet sales.

The public is becoming aware of the tax inequities. A survey commissioned

by the U.S. Conference of Mayors and the National Association of Counties

found that 72 percent of Americans say it's unfair that online retailers

do not collect sales taxes.

More than half of American households have a computer, and more than

half of all adults have access to the Internet. Interactive television,

including shopping while watching, may arrive sooner than some of us might

prefer.

Congressional leaders will be reluctant to antagonize voters by imposing

a tax on Internet purchases when they haven't had to pay one before. Obviously,

Congress needs to hear more from retailers back home who are losing sales

to online vendors. The most effective testimony before Congress last spring

was by Les Ledger of Copperas Cove, Texas. Ledger spoke to the House Committee

on Ways and Means' Subcommittee on Oversight on behalf of the National Retail

Federation, his family furniture store and his 14 em-ployees. Ledger argued

that government tax policy should establish a ""level playing field' — where

a product is taxed (or not taxed) the same regardless of how it is ordered

or delivered."

Sens. Byron Dorgan (D-N.D.) and George Voinovich (R-Ohio) have drafted

legislation that would simplify sales and use taxation systems to achieve

a level playing field. Meanwhile, more than half of the states are involved

in the Streamlined Sales Tax Project.

Formed in March 2000, this project is working to simplify sales taxes,

create uniform definitions and procedures across states, and develop technologies

"that can be used by traditional brick-and-mortar vendors and vendors involved

in e-commerce."

Unfortunately, the tax equity issue did not rank high on the reform

agenda of either presidential candidate, or in any congressional campaign.

The muddled election results had little impact on how this issue might be

resolved. But the longer Congress waits to act on this problem, the harder

it will be to resolve.

Bonnett is an independent public policy consultant in Brooklyn, N.Y. His

latest book, "Competing in the New Economy: Governance Strategies for the

Digital Age," was published by Xlibris Inc. in October 2000.