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BUSINESSWEEK ONLINE: Business Week ebiz | |||||||||||||||||
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The E-Sales Tax Holiday Won't Last Forever States and localities will not pass up the chance to collect these levies. But E-commerce will survive and a more rational sales tax system may result Amid all the euphoria about the rapid growth of E-commerce, there's an important thing many people are forgetting: Online merchants are getting a free ride that's not likely to last. For the time being, nobody is paying sales taxes when they buy books, clothing, computer hardware, or anything else on the Internet. Given that the average sales tax rate in the U.S. is about 6.33%, that means that state and local governments are giving E-business, in essence, a huge subsidy. University of Chicago economist Austan Goolsbee recently estimated that the value of this subsidy was more than $300 million last year. The big hope of many cybermerchants is that this tax holiday will last forever. It won't. Sales taxes account for about 49% of all state tax revenues -- more than individual and corporate taxes combined. In cities and counties, meanwhile, 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 paying for schools, law enforcement, highway repair, and all of the other important work they do. As E-commerce accounts for a bigger chunk of the economy, there's no way they're going to let sales tax revenues dwindle away. BUMPING BARKSDALE. How seriously do state and local government officials take this issue? Consider the turbulent story of the Advisory Commission on Electronic Commerce -- the powerful group that Congress created last year to study Net tax policy. In a carefully crafted compromise, the Commission was supposed to have eight members from the Internet industry and eight from states and localities. When it was announced in December that Congress had apparently inadvertently named nine business members and seven from government, the U.S. Conference of Mayors and the National Association of Counties got so mad that they filed a lawsuit to block the Commission from meeting. The result: Congress was forced to bump former Netscape Communications Chairman James Barksdale from the commission and appoint in his place a county commissioner from Oregon. (Other members of the Commission include AT&T CEO C. Michael Armstrong, Gateway CEO Theodore Waitt, America Online Chief Operating Officer Robert Pittman, Utah Governor Michael Leavitt, and U.S. Trade Representative Charlene Barshefsky.)
The first gathering of Congress's Advisory Commission on Electronic Commerce is scheduled for June 21 in Williamsburg, Va. Sales taxes are probably the most important item on the commission's agenda. Although most people aren't aware of it, last year's much-ballyhooed Internet tax moratorium did not apply to sales taxes -- only to new taxes. That means that, technically, sales taxes are due whenever anyone makes a purchase online. Because no mechanism for collecting the taxes has been established yet, states and localities have been letting them go uncollected. But in a sign that they have every intention of developing such a mechanism, the National Governors Assn. in its winter meeting this year called for the creation of a so-called 21st century sales tax that would apply to the Internet.
Ultimately, the sales tax issue could have a bigger impact on the states themselves. Why? Because in order to persuade business groups and Congress to establish a comprehensive sales tax plan for the Internet, "the price is going to be a dramatic simplification" of the existing sales tax system, according to Walter Hellerstein, an expert in cybertax policy at the University of Georgia law school. This means that each state will be pressured to adopt one uniform sales tax rate -- rather than having different systems in each city and county. Moreover, it implies that the states will have to agree among themselves what items should be taxed. Right now, products such as food and magazines are subject to sales taxes in some states, but not in others. Finally, it will require uniform registration, remittance, and filing procedures. That's a good development, one that will lower costs for business and consumers alike. In a sign that the states recognize the need for simplification, the National Governors Assn. already is studying how to adopt these changes. No doubt, many of them will be painful. Cities and counties, for example, are likely to be unhappy about the loss of control over their own sales tax revenues. But there may be no choice. The alternative to these reforms -- losing sales tax revenue on E-Commerce -- would be even worse.
Mike France covers covers Legal Affairs for Business Week's in New York _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ |
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Mike France is Business Week's Legal Affairs editor | ||||||||||||
