America needs uniform taxation for stores, mail order, and online

THE DIGITAL BAZAAR Click for June 22, 1998 issue

Nobody enjoys paying taxes, but they will be paid -- even on the Internet. Just how to go about taxing the Net has been the subject of much anguished debate. But within the next couple of weeks, the U.S. House of Representatives is expected to take a big step toward resolving this vexing problem.

The measure, based on a proposal by Representative Chris Cox (R-Calif.), will ban all future taxes on access to the Net and freeze, for three years, other levies on cybercommerce. At the same time, it will give state and local governments the opportunity to develop a uniform system for imposing sales taxes on goods and services -- no matter how they're purchased.

Such a freeze makes a lot of sense, but only if it leads to an agreement on how to tax these sales. The temporary moratorium should not be a way to ease into a permanent ban on cybertaxes, as some supporters fervently wish.

The rules -- when they are resolved -- should be simple. If a Main Street retailer must collect tax on a product, so should mail-order sellers and Internet marketers. Conversely, if the product is tax-free at a store counter, it should be exempt if you buy it over the phone or on the Net. And the rules should apply for everything from shirts to software. Says Colorado Governor Roy Romer: "The tax should not depend on the way you buy it or from whom you buy it."

GIVE AND TAKE. Establishing such a system will take lots of cooperation among government officials, mail-order sellers, and the burgeoning ranks of cybermerchants. And in early, behind-the-scenes talks, some of the parties -- especially the mail-order companies -- have been exceedingly reluctant to give up a pricing advantage they now have over Main Street.

Still, all sides are talking. Business and government officials are trying to hash out key issues through a commission sponsored by the National Tax Assn., a nonpartisan group of public and private tax experts. And that's progress on an issue that has been stalemated for decades.

The timing for a sales tax solution will never be better. For all its promise, Internet commerce is still barely a blip on the sales screen. The White House figures that perhaps $4 billion or so worth of goods was sold on the Net last year, compared to nearly $80 billion through catalogs. As long as the tax revenues at stake remain modest, a deal is possible. But once E-commerce takes off, chances for compromise diminish. The interest groups will get more intransigent as the dollars involved get bigger.

TOUGH SELL. For now, the debate remains largely theoretical. And it centers around three issues: fairness, cost, and the belief that taxing the Net would kill the industry in its infancy. The first concern is legitimate. The other two are tougher to buy.

Cybersellers are right to worry about double taxation or about having to collect taxes while some competitors will not. Without a uniform regime, a state where a seller is located could impose a tax, even as the home state of the buyer does as well. And direct sellers could be in the curious position of having to collect tax if a product is ordered on its Web site, but not if it's purchased by phone.

The claim that collecting sales taxes from buyers in 50 states would be complex and expensive is a lot weaker. Software to figure such levies is already widely available -- and at nominal cost. For instance, Taxware International in Salem, Mass., offers tax-calculation software as a stand-alone product or as part of an overall E-commerce system purchased from vendors such as Open Market. The maximum cost: $3,500 per year.

The claim that taxing transactions on the Net will somehow kill an infant industry is hardest of all to accept. Little evidence exists that price -- as opposed to convenience and selection -- is attracting customers online. Besides, even if it was, why should such businesses enjoy a tax advantage over Main Street retailers?

The bottom line is that state and local governments will raise whatever revenues they can, using whatever taxes are available to them. If the sales tax base is narrowed because Web sellers get a special exemption, states will simply hike other levies to make up the difference. And it's hard to see how that's going to help the economy.

By Howard Gleckman in Washington


Updated June 11, 1998 by bwwebmaster
Copyright 1998, Bloomberg L.P.
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