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Taxing  the Internet: an Idea That Won't Die

 By  Leslie C. Wood (

 French  statesman, Jean Baptise Colbert (1619-1683) once said: ``The art of taxation  consists in so plucking the goose as to obtain the largest amount of feathers  with the least amount of hissing." And, the ongoing debate over electronic  commerce taxation is causing more than its fair share of hissing. Digital  commerce activity monitor  polled over 3,500 online consumers to measure the impact of ecommerce taxation.  The poll, which was taken during the summer of 1999, showed split results. More  than 37% of the respondents said they would not have made their purchases online  if sales tax had been included. Another 37% said they would have, while 26% said  they did not know if they would have purchased the item online if tax had been  included.

 ECommerce  Taxation Could Mean Growing Pains 

According  to Datamonitor, industry analyst  experts, sales over the Internet will grow to $200 billion by 2001. However, the  rate of growth of online spending per person is declining even though total  online retail spending is increasing, according to a study conducted by The  Wharton School of Business. The study also found there is a significant dropout  rate among online shoppers, and 15% of online buyers from 1997 did not buy  online in 1998.  Only 50% of the  dropouts from 1998 returned to make purchases in 1999. In addition the study  found that new buyers are not arriving as quickly to take their place. The  implication is that online shopping is just another way of shopping.  According to the study, concerns about  privacy and trust were among the most important factors that distinguished  buyers from non-buyers online.

          However, consumers are still spending big dollars online. According to  the National Retail Federation/Forrester Online Retail Index, consumers spent  $2.8 billion online during January 2000, half as much as was spent during the  entire holiday season. Media products including books, music, videos and  software accounted for $636.6 million, or 23.3% of the month's purchases. The  combined air, hotel and car rental business booked online in January totaled  $582.8 million, or nearly 21% of all online purchases.

 Who  is Liable?

 So,  what is all this hype about taxing online shopping? In October 1998, the  Internet Tax Freedom Act was signed as public law. The act was based on the  simple principle that information should not be taxed. In addition, the Advisory  Commission on Electronic Commerce (ACEC) was established to study electronic  commerce tax issues on whether electronic commerce should be taxed, and if so,  how it can taxed in a manner that ensures such commerce won't be subject to  special, multiple or discriminatory taxes. State and local offices were given a  prominent voice on the commission. However, Congress retains full authority to  change or discard the Commission's proposals. There is also a sense of Congress  that there should not be any federal taxes on Internet access or electronic  commerce. Virginia Gov. James Gilmore III, chairman of the commission, was  appointed the daunting task of advising Congress on the taxation of electronic  commerce. The moratorium for taxes is for three years which according to Gilmore  was set up so that the Internet would have enough time to grow and that the  commission would have enough time to come up with an acceptable public policy  with respect to taxation on the Internet.

          On March 20, a majority of ACEC members agreed that that moratorium on  new, Internet taxes set to expire on October 21, 2001, should be extended five  years. In addition, a majority of the commission members who voted endorsed  components of a Feb. 9 proposal by members of the ACEC Business Caucus, which  includes representatives from America Online, AT&T, Charles Schwab &  Company, Gateway, MCI Worldcom and Time Warner, calling for a permanent ban on  any tax imposed on the Internet. The proposal also calls for sales of books,  music, records and other information and entertainment products by both  retailers and e-tailers to be exempt from sales and use tax. For a copy of the  business caucus' proposal, visit  The proposal has not been taken lightly by retailers. Various representatives  from Wal-Mart and the Tandy Corporation criticized the proposal, saying it would  provide tax breaks to businesses represented on the commission at the expense of  other businesses.  The e-Fairness  Coalition, a group representing various retailers, e-tailers, retail  corporations and shopping centers, has also criticized the  proposal.

          But in May the U.S. House of Representatives endorsed conclusions of the  ACEC by passing legislation, 352 to 75, to extend for five years the moratorium  prohibiting multiple or discriminatory taxes on electronic commerce and  eliminating taxes on Internet access fees. At press time, the Senate had yet to  address the issue. 

State  and Local Governments Say Yes to ECommerce Taxation

 It  seems that state and local governments are very much for taxing electronic  commerce but the problem is that sales, use and income tax based on physical  location and property are difficult to apply to the Internet. According to 15  U.S.C. section 381, a state may not collect income tax from a business that  merely solicits orders in that state.  Before a state may impose a tax, there must be some connection between  the taxpayer or the taxpayer's activities and the state that is sufficient  enough to allow the state to exercise jurisdiction over their person (commonly  referred to as a nexus). While the required nexus is similar to grounds for  personal jurisdiction, sales and use tax often require that a person or business  be physically present in the state before such a tax can be imposed. According  to a report issued by Ernst&Young, many state  and local officials fear that the ecommerce boom will lead to erosion of the  state and local retail sales and tax base, while e-retailers want to avoid the  administrative cost of implementing various regional and local tax rate systems.

          Most state and local officials on the commission want a clear statement  supporting equal sales tax application to goods sold over the Internet and by  brick-and-mortar retailers.  However, after extended debate, the commission members voted 11-1 to  adopt components of the proposal, with seven abstentions. While the commission's  endorsement of components of the Business Caucus proposal was in the final ACEC  report forwarded to Congress in April, it was not be submitted as a formal  ``finding or recommendation."

          According to David Hardesty, vice president of Markle Stuckey Hardesty  and Bott, a San Francisco and Larkspur, Calif., based CPA firm, and contributing  author to E-Commerce Tax News sees  several problems associated with taxation of ecommerce.

 ``A vendor operating out of a bedroom does  not have the staff to deal with the tax rules of over 30,000 state and local  authorities in the USA and an untold number of foreign tax authorities,"  Hardesty says.  Another problem says  Hardesty is the proliferation of digital products. (When a product, such as  software, can be delivered electronically there is no need to know the location  of the buyer to complete a transaction. The seller only needs a credit card  number). Hardesty says that vendors must make an effort to gather information  that is needed for tax compliance when the vendor sells digital products in  states where those products are subject to sales and use tax.

          Whatever the issues are with taxing or not taxing ecommerce sales, there  are pros and cons for each. What effect potential taxes will have on ecommerce  sites is yet to be determined. 

Leslie C. Wood is a freelance writer  based in Philadelphia, Pa. Her articles have been published in national  magazines and newspapers as well as on many Web sites. For more information,  visit her Web site at



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