e-Taxes for e-Tail?

0 Comments | Insight on the News, Jan 31, 2000 | by Sheila R. Cherry

Online retailers surfed the holiday-season wave while enjoying their own gift from Uncle Sam, a moratorium on Internet sales taxes. But states are crying foul.

Like the unfulfilled threat of the Y2K bug that failed to infect computer data worldwide, Internet commerce did not succeed in shooing shoppers from the aisles of Main Street stores during the 1999 holiday season.

Yes, electronic commerce did generate $4 billion between Thanksgiving 1999 and New Year's Day, according to Forrester Research, Inc. But 1.2 billion people still did their holiday shopping in malls and other retail stores, according to RCT Systems Inc., a company that provides the National Retail Traffic Index for the shopping-center and retail industry.

In fact, mall-based sales between Thanksgiving and Christmas 1999 outpaced the 1998 holiday season by a robust 7.7 percent, according to the International Council of Shopping Centers. The largest share of in-store sales was for music, videos and other forms of home entertainment -- a universal favorite of online shoppers. Now, as Americans catch their breath following the holiday spending frenzy, a million-dollar question is bouncing between Congress and some states: Should e-commerce sites be obliged to collect sales taxes from customers beyond their own state borders?

On Jan. 7, House leaders at a Capitol Hill press conference pledged that there would be no new taxes imposed on technology. The GOP Congress "does not wish to single out the engine of productivity in America for discriminatory tax treatment," announced California Republican Rep. Christopher Cox, chairman of the House Policy Committee and a member of the Commerce Committee.

An Ernst & Young study released last June shows that states and local jurisdictions stand to "lose" very little in tax collections through e-tailing. About 80 percent of Internet sales result from business-to-business transactions, according to Ernst & Young, most of which are exempt from sales taxes because the goods are sales for resale or manufacturing or nontaxable business services. And even 63 percent of the business-to-consumer sales consist of nontaxable services, the accounting firm claims. However, although e-commerce buyers of taxable items in most states are legally subject to "use" taxes equivalent to the sales taxes they would have paid instate, anecdotal evidence suggests that many, if not most, do not. State and local governments are convinced that as more shoppers go online, state sales-tax bases will erode.

Along with Main Street retailers, states and municipalities still are bristling over the not-yet-assessed effect of the Internet Tax Freedom Act, or ITFA, of 1998. The law placed a three-year ban on the imposition of new taxes on access or commerce that is conducted solely on the Internet. It expires in October 2001.

The tax moratorium basically precludes states from requiring Internet vendors with no physical presence within their borders to collect sales and use taxes for the products they sell to residents who do live there. It is based on legal principles established by the U.S. Supreme Court in the 1967 case National Bellas Hess Inc. vs. Department of Revenue of the States of Illinois. It was determined in that case that out-of-state catalog-sales companies do not have to collect and remit a use tax from customers in a state in which the companies do not have "legal nexus" -- that is, a physical presence -- for such a tax. By unburdening e-commerce from the prospect of laws in a multiplicity of jurisdictions, Congress and the administration reasoned, the budding cybereconomy could reach its fullest potential unimpeded.

For now, local politicians and instore retailers are voicing their opposition to a permanent version of the federal-level ITFA in appearances before the 19-member Advisory Commission on Electronic Commerce, or ACEC, set up by a provision of ITFA. Comprised of state and federal government officials as well as business representatives, the commission is scheduled to make a recommendation to Congress in April about the fairness and equity of keeping the Internet permanently tax-free. Consensus on the commission is not exactly a forgone conclusion.

In fact, Utah Republican Gov. Mike Leavitt and Dallas Mayor Ron Kirk, both ACEC members, aren't so quick to endorse a permanent ban. Their concerns focus on reduced state-tax revenues, an imbalance in tax parity created by the so-called "digital divide" and maintaining a level playing field between Main Street and online retailers.

But ACEC's chairman, Virginia Republican Gov. Jim Gilmore, generally rejects the idea of allowing states to require businesses to collect sales and use taxes on remote business-to-consumer Internet transactions. "Small entrepreneurs would not be able to compete if they were required to calculate, collect and remit sales and use taxes to nearly 10,000 different taxing jurisdictions," he tells Insight. "Consumers, who already pay heavy taxes on their phone lines to log on the Internet, and who have to pay substantial shipping and handling charges, would find Internet sales to be too expensive and would log off in large numbers."