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
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
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
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
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.