the 1998 Internet Tax Freedom Act halfway through its three year moratorium
on new or discriminatory taxes on E-commerce, individuals and organizations
on all sides of the issue are preparing for a major battle over whether states
should be permitted to levy and collect sales taxes from transactions concluded
over the Internet. Industry and government associations from all sides are staking
out their positions, and the topic has reached into the presidential campaign.
The major political question pits sales taxes as stiflers of commerce against
taxes as enablers of services.
caught in the middle on this issue are states that have become E-commerce hubs.
With their economies benefiting from the presence of a thriving Internet industry,
they are afraid to do anything to upset the apple cart. Meanwhile, both their
Main Streets and shopping malls are complaining about business being lost to
tax-free online retailers, and pointing out that lost revenues mean lower taxes.
In a downturn both retailers and state services could be severely compromised.
The nation of Singapore doesn't have problems with this balance. They are providing
tax incentives to lure E-commerce trading centers.
Massachusetts Governor Paul Celluci made sales taxes of Internet commerce a
prominent point in his State of the State Address on January 20. "It makes no
sense to put a sales tax on Internet commerce," he announced. In fact, he had
earlier overruled his own Department of Revenue and declared Massachusetts an
"Internet tax-free zone," thereby waiving state sales taxes on Internet services
that were still permitted under the Internet Tax Freedom Act. That Act put a
hold on new taxation of Internet access and on "multiple or discriminatory taxes
on electronic commerce." The law did not prevent states from using existing
sales tax laws to tax sales within a state, and states are free to collect sales
tax for items sold over the Internet and delivered within the state. They
cannot compel companies in their state to collect taxes on items delivered out
of state, nor can they compel out-of-state companies to collect sales tax on
items delivered within their state.
is a major shaping force in the taxation debate across the nation. Presidential
candidates Bill Bradley and Al Gore have issued statements in which they support
the current moratorium and look forward to a tax policy that "encourages the
astonishing growth of the Internet" without "stripping states and localities
of the revenue they need to educate our children and fight crime." Republicans
also generally support the current moratorium, and some -- like Steve Forbes
and John McCain, say that they will make the Internet a permanent tax-free zone.
George Bush does not argue for a permanent ban, possibly because his home state
of Texas has no income tax and relies more than most states on sales tax revenues.
As evidence of how critical this issue is seen by politicians of all stripes,
commentator William F. Buckley, Jr., devoted the very last edition of his long-running
Firing Line show to a debate on the question "The Federal Government Should
Not Impose a Tax on Electronic Commerce." Conservatives such as former Representative
Jack Kemp argued that E-commerce does not fundamentally hurt retail stores.
Pointing to Amazon.com as an example, he suggested that since book sales are
up nationwide it was not the case that online book sales would otherwise have
gone to retail merchants. His opponents included columnist Robert Kuttner, who
pointed to a loss of $5 billion per year in state and local tax revenues due
to catalog shopping. Kuttner says that the annual loss of revenues due to the
Internet will increase by $2 billion each year.
important issue raised in this national debate is the so-called Digital Divide.
This refers to the growing gap in opportunities between those who have access
to the Internet and those who don't. The term was originally coined to refer
to educational disadvantages that would result as those with more disposable
wealth were able to provide this new resource for their children or their school
districts, while the poor and the nearly poor would slip further behind in education
and job opportunities. However, if Internet shopping is favored with a tax exemption,
the economic effect is a surcharge on the purchases of those who cannot afford
Internet access, further widening the divide. As pointed out by Dallas' Mayor
Ronald Kirk, this would "shift a disproportionate burden for paying for local
government to the poorest of Americans." Mr. Kemp countered that the Internet
economy would create wealth that helps the poor through creation of jobs and
through "the ability of many companies from Microsoft to Oracle to Sun to Intel
to be giving away computers free to schools." That there is a Digital Divide
is supported by such studies as one by pollster Mark Baldassare. He found that
in California 43 percent of those with incomes over $80,000 bought gifts over
the Internet, but that only 7 percent of those with incomes below $40,000 did/
He also found that while 20 percent of all adults shopped online, only 7 percent
of Latinos did.
is needed, of course, is real information about how much the absence of sales
taxes on Internet purchases hurts the states (and bricks-and-mortar retailers),
and to what degree sales taxes would hurt E-commerce. Unfortunately, unbiased
information is not yet available. There is a National Advisory Commission on
Electronic Commerce (ACEC), a joint creation of industry and government that
was formed as a result of the Tax Freedom Act, that might be such a body. However,
with three months to go before issuing its report, it has given strong signals
already that it is strongly in the camp of those opposed to any form of Internet
taxation. Its chair, Virginia's Governor James Gilmore is a long-standing opponent
of taxation and has reportedly proposed that one way to bridge the Digital Divide
is to use money currently earmarked for welfare. One piece of evidence that
might buoy those supporting Internet taxation is the recent holiday season,
in which clicks-and-mortar retailers, who are subject to some taxation, did
about as well as pure-play Internet retailers.
proposal for a national sales tax on Internet purchases has been submitted by
Senator Ernest "Fritz" Hollings (D-SC) as the Sales Tax Safety Net and Teacher
Funding Act. His bill would require the Federal Government to collect sales
taxes on transactions that are currently exempt. Monies collected under this
bill would be distributed to states for use in funding education. Hollings'
bill attacks one of the serious problems with other attempts to garner tax revenues
from Internet sales. There are 50 states, most of which have sales taxes, and
over 700 local taxing authorities that might want a piece of the action, just
as they now get it on retail sales within their jurisdictions. On-line merchants
have protested that the record keeping necessary to collect and pay sales taxes
would be overwhelming. However there are software products that now are used
by companies that need to comply with multiple tax codes which could clearly
solve most of this problem. The two largest vendors are Taxware and Vertex.
In fact, Taxware is developing software that could be used to implement a proposal
by Governor Michael Leavitt (R-Utah) that companies voluntarily agree to collect
taxes and use a "trusted" third party to make distributions to the states. Hollings'
bill essentially makes the U.S. Treasury that trusted third party.
most important issue is probably the economic effect of taxing or not taxing
Internet sales. States and localities argue that they suffer a loss of revenue
that impacts their ability to provide services. Retailers argue that they are
playing to a different, and more onerous, set of rules than are the Internet
companies. Regions that are centers of E-commerce argue that sales taxes will
depress the booming economy, and that the growth of the Internet economy will
make up for any loss in retail tax revenues. Committed anti-tax politicians
argue on principle against adding another tax. Every side has numbers to back
up its claims; all are sketchy and inconclusive.
study from the American Bar Foundation and Harvard Law School concludes that
the fervency found in each of the competing positions is misplaced. The study
concludes that "[t]he results suggest that the costs of not enforcing taxes
are quite modest and will remain so for several years. At the same time, compliance
costs are likely to be low and the benefits of nurturing the Internet diminishing
over time." In such a situation, the study suggests, a continued moratorium
is the best policy.
believe that some form of taxation of Internet transactions is inevitable. The
rising Internet economy, even if it lasts, provides benefits that are substantially
regional. Just as the tourist trade that benefits from the Los Angeles movie
industry is only a few blocks from such economically deprived areas as Watts,
the existence of Seattle's hotbed of Internet activity doesn't do much for lumber
and paper workers who have lost jobs in other parts of the state. Similarly,
there's no obvious place in Internet commerce for the majority of retail workers
- and one in five American workers is involved in traditional retailing.
Companies that wish to engage in the policy debate should, in the short run,
contact the ACEC; in the long run we believe their best strategy is to work
for ways, perhaps along the lines of Senator Hollings' bill, that will make
tax collection, when it comes, minimally intrusive.