Opposition grows to excise, sales tax - taxing online commerce - Small Business Financial Adviser

Nation's Business, August, 1996 by Tom McCollum

Last fall, the Florida Department of Revenue advised the state's Internet-access providers that they would be subject to telecommunications excise and sales taxes beginning July 1, 1996. Providers would have to pay a 2.5 percent tax on their gross receipts, and their business customers would have to pay a 6 percent tax on their purchases of on-line services.

Swift, forceful opposition from the online community, however, helped win a one-year delay in enforcement of the tax. "We already pay taxes on our phones," says Suzi Pilat, vice president of Intelligence Network Online, an Internet-access provider in Clearwater, Fla. "Why should we charge another tax on a tax? That's how it's being viewed, as a double tax."

Florida is just one of several state or local governments seeking to join the list of jurisdictions that tax on-line commerce-estimated at $350 million in 1995 and expected to top $7 billion a year by the end of the decade, according to Forrester Research, an information-technology research firm in Cambridge, Mass. Such taxes, the states and localities contend, would help make up for revenue lost when products and services are purchased on-line rather than through channels where taxes customarily are levied.

According to a recent study by the Center for Community Economic Research, at the University of California at Berkeley, growth in on-line sales would result in a "devastating loss in local-government revenue."

The states and localities tax on-line providers rather than on-line sales of products and services because of their interpretation of a 1992 Supreme Court decision involving mail-order sales. In that case, the court barred states from levying sales taxes on out-of-state companies that have no facilities within the state's borders.

"Obviously, state laws weren't structured to deal with this issue," says G. Kent Johnson, a partner in the Seattle office of KPMG Peat Marwick, an accounting and management consulting firm. "Some states are trying to take their existing laws and fit them onto that application, but they don't fit very well."

Intelligence Network and other on-line providers, as well as business groups such as the Florida Chamber of Commerce, have strongly opposed on-line taxes and have mounted petition drives on the Internet to pass the word.

Now Florida Gov. Lawton Chiles has delayed enforcement of the taxes until July 1997 and has ordered the creation of the Florida Telecommunications Task Force to conduct further research on whether existing telecommunications taxes should be applied to on-line services. The task force is to report its findings by Feb. 1.

Nine states, including Connecticut, New York, Ohio, and Texas, already tax on-line services in one way or another. Some tax the sales of on-line services; others tax the gross receipts of on-line services and Internet-access providers.

The main opponents of these taxes are industries with a stake in electronic commerce, including on-line services, computer companies, and banks. They have formed the Committee on State Taxation to oppose taxes on on-line services.

Taxes on Internet-access providers and Web sites may impede the growth of the on-line industry by increasing the cost of purchasing Internet services, according to providers such as Jack McCollum, managing partner of Econonet, an Internet-access provider in Houston. That may make it harder for small, start-up Internet providers to compete against low-cost offerings from companies such as AT&T and MCI.

"The bottom line will be if they drive out too many of the independents, the cost of the Internet service will go up," says McCollum. "The losers are going to be the consumers."