| BUSINESSWEEK ONLINE : JUNE 21, 1999 ISSUE | ||||||||
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| LEGAL AFFAIRS
Commentary: A Web Sales Tax: Not If, but When Death and taxes are the only two certainties in life, right? Well, don't break the news to anyone on the Net. Amid all the euphoria about the rapid growth of E-commerce, there's an important thing many people have forgotten: Online merchants are getting a free ride on taxes. For the time being, nobody is paying sales taxes when they buy books, clothing, or anything else on the Net. Given that the average sales tax rate in the U.S. is about 6.3%, that means state and local governments are giving E-business a huge subsidy. University of Chicago economist Austan Goolsbee estimates the value of this gift was $430 million last year. The big hope of many Net merchants is that the tax holiday will last forever. It probably won't. Sales taxes account for about 49% of all state tax revenues--more than individual and corporate taxes combined. And in cities and counties, sales levies account for about 16% of all taxes collected. That means, basically, that the nation's governors and mayors need sales taxes to balance their budgets--not to mention to pay for schools, law enforcement, highway repair, and the other important work they do. As E-business accounts for a bigger chunk of the economy, there's no way they're going to let sales tax revenues dwindle away. This will have a huge impact on E-biz. Net shoppers are nothing if not price-sensitive. In a recent study of 25,000 consumers, Goolsbee concluded that online spending would drop by 30% or more if taxes were suddenly imposed. This short-term blow wouldn't kill healthy E-businesses, but it would certainly threaten many marginal ones. SIMPLIFY OR ELSE. The nation's governors and mayors are also in for a New World Order. To get the legal authority to force out-of-state merchants to fork over sales taxes, they're going to need an act of Congress--not to mention the cooperation of the business community. The price for that assistance, however, is likely to be a dramatic simplification of the existing tax system. States will be forced to harmonize differences over whether items such as clothing and medicine are subject to taxation. Also, they'll face pressure to get rid of the crazy quilt of city and country sales taxes now in place-- a prospect that's certain to rile local governments. The Net ''is going to force people to rethink sales taxation,'' says Jonathan Zittrain, executive director of Harvard Law School's Berkman Center for Internet & Society. ''A number of [ideas] that would have seemed radical without the Internet are becoming mainstream now.'' Although most people aren't aware of it, sales taxes are technically due whenever anyone makes a purchase online. Last year's much-ballyhooed Net tax moratorium only applied to ''new'' levies, not already existing state and local sales taxes. These levies haven't been collected, however, because of the inability of states and localities to force merchants outside their borders to pay. The same holds true, incidentally, for the $93 billion catalog sales industry. But because the L.L. Beans and J. Crews never threatened to eat as big a chunk of retail sales as the Internet does, states and localities have been willing to let the issue slide. They're drawing the line at the Net, though. Online retail spending is growing at a rate of 70% annually--and is expected to hit nearly $108 billion by 2003 (chart). ''So many more products can be sold online than through mail order. That's why [cities and states] are making such a big deal about this,'' says Michael Maserov, senior policy analyst at the Center on Budget & Policy Priorities in Washington. As a sign of how serious governors and mayors are about this issue, consider the saga of the Advisory Commission on Electronic Commerce (ACEC)--the group Congress created last October to advise it on Net tax policy. In a carefully crafted compromise, Congress decided the ACEC would have eight members from the Net industry and eight from states and localities. When it was announced in December that Congress had named nine business members and seven from government, the U.S. Conference of Mayors and National Association of Counties got so mad they filed a lawsuit to block the Commission from meeting. BYZANTINE. The result: Congress bumped former Netscape Communications Corp. Chairman James Barksdale from the ACEC and appointed a county commissioner from Oregon. After a delay of months, ACEC will finally hold its first meeting on June 21-22 in Williamsburg, Va. Cities and towns aren't the only ones worried. Traditional brick-and-mortar stores worry that it will be impossible for them to compete with E-tailers unless a way is developed to collect taxes on the Net. Together, these two groups appear to have more than enough clout to ensure that the Web doesn't stay taxfree. ''The amount of money at stake is just too great'' for the current state of affairs to continue, says Charles E. McLure, a senior fellow at Stanford University's Hoover Institution. But to win this war, states and localities are going to have to brace for big changes. Because of differences in local taxes, there are dozens of tax rates in some states. And there are enormous variations from place to place in the types of goods subject to sales levies. Items such as food, clothing, medicine, and newspapers are treated differently jurisdiction to jurisdiction. Even with the help of sophisticated software, it would be all but impossible for most Web merchants to cope with the existing sales tax system, McLure says. The states recognize the problems and are trying to cope with them. At its February meeting, the National Governors' Assn. called for a ''21st Century sales tax'' that would apply to the Net. In so doing, they agreed to work to establish a single rate in each state, harmonize rules across state lines, and create a more centralized tax-collection system. That's a good development and should ultimately lower costs for business and consumers alike. No doubt many of these adjustments will be painful. But there is no choice. The alternatives to these reforms--losing a piece of the E-commerce pie--would be worse. By Mike France To read a letter to the editor about this story, click here. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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