No log-on tax, but states still get a piece --
and want more -- of the e-purchase pie
By Kay Bell • Bankrate.com

May 19, 2000 -- Don't get too excited about recent Congressional legislation banning Internet taxes.

While Congress wants to ensure that you won't be charged extra fees just to sign on with your Internet service provider, you'll still have to pay sales tax on your online purchases. And, if some state tax departments and traditional retailers get their way, that amount could go up.

The Internet Nondiscrimination Act temporarily bans some extra online fees, but industry watchers say passage of the legislation is mainly symbolic. Full-fledged cynics go even further in their dismissal of the bill, calling it a blatant election-year attempt to curry favor with the high-tech industry.

And they argue that H.R. 3709 ignores the more complicated issue of uniformly taxing Internet purchases. As electronic commerce grows, the ultimate resolution of this tax skirmish will determine whether online consumers are victors or casualties.

What's in it for me?
From the White House's call to bridge the Digital Divide to various Congressional pro-technology bills to state lawmaker efforts to lure high-tech businesses to their jurisdictions, technology concerns dominate the legislative landscape. And most politicians don't hide their support of measures to make online access and participation easier.

But what exactly does the Internet Nondiscrimination Act do for you, sitting there at your keyboard and reading this?

First, the legislation extends for five more years -- until October 2006 -- the current ban on taxing Internet access. That means that the money you pay each month for your Internet connection goes just to the provider, with no taxes for state or local governments.

Supporters of this tax ban say it's crucial because there is no guarantee that the Internet access service is provided in the same state where it is billed. This is because Internet access can be provided through any number of "points of presence," or POPs in Web lingo. National providers can have thousands of access points, located in any number of taxing jurisdictions. Until there is a way to specify which point is used for access, there should be no tax on connections, bill sponsors argue.

Second, under the prior Internet Tax Freedom Act, 10 states that already were devising or had instituted taxes on Internet access were grandfathered. But that option is gone if the new legislation makes it into law. So when the current ban expires in October 2001, tax officials in Connecticut, Wisconsin, Iowa, North Dakota, South Dakota, New Mexico, South Carolina, Tennessee, Texas and Ohio can no longer collect Internet access taxes.

Finally, the bill extends the current limitation on "discriminatory" Internet taxes. These include taxation by two or more states of the same product bought over the Internet, as well as any taxes that treat Internet purchases differently from other types of sales. For example, customers who purchase a sweater from an online site couldn't be charged more in taxes than they would have paid if they'd walked into the e-company's parent store downtown and bought the same apparel.

Sales taxes remain, depending upon where you live
But to the surprise of many online buyers, neither the Internet Nondiscrimination Act nor its predecessor stops states from collecting sales taxes on online purchases. Internet retailers, like their catalog-selling colleagues, must collect sales tax from customers in areas where the companies have an actual outlet.

It's in this limited sales tax collection, bill opponents say, that the real tax discrimination exists. Rather than protecting Internet commerce against unfair taxation, they argue, current legislation simply codifies tax bias in the other direction: against brick-and-mortar businesses.

Unlike online operations, traditional retailers are required to collect and remit taxes at the point of sale, argues the National Retail Federation, giving the Internet sellers an unfair tax advantage. All retailers, regardless of the channel in which they do business, should be treated equally with respect to tax collection obligations, according to the national merchants' group.

"In an industry where a 1 to 2 percent profit margin is standard," says Steve Pfister, the Federation's senior vice president of government relations, "a 6 to 8 percent (sales) tax break is a significant competitive advantage.

"Main Street retail businesses simply can't compete with such an unfair tax pricing advantage."

Use tax complications
State tax collectors agree with traditional retailers that legislative activity now is too far skewed toward the Internet industry. And state situations, when it comes to Internet sales, are further complicated by use taxes.

Every state that collects sales taxes also has a use tax, basically a sales tax on merchandise purchased beyond a state's sales tax boundaries. Consumers are required to pay use taxes, created in the 1930s, to their home state treasury on any merchandise they will use within the state, but which was bought sales tax free from an out-of-state supplier.

But state enforcement of use tax compliance has been negligible. States routinely try to inform and educate citizens about this tax responsibility, but follow-up to ensure the collection is difficult and therefore rare.

State tax collectors fear that the Internet Nondiscrimination Act's continued postponement of online tax issues will take the urgency out of efforts to address the estimated 6,000 diverse sales tax jurisdiction systems across the country.

Without a comprehensive system to simplify and consolidate these tax structures and collection methods, state officials say, the growing reach of e-commerce will mean more and more lost tax money for their treasuries.

Delaying inevitable tax decisions
Congress finally has begun to examine the wider Internet taxation issues. On May 16, a Ways and Means subcommittee hearing featured a debate between traditional business representatives and totally tax-free Internet advocates.

That exchange, however, will not affect the Internet Nondiscrimination Act, approved by an overwhelming 352-to-75 House vote and forwarded to the Senate. On that side of Capitol Hill, however, passing the legislation is less certain, despite several pending bills calling for a permanent Internet tax moratorium.

President Clinton also has some reservations about the moratorium legislation. The White House has not threatened a veto, but it has indicated dissatisfaction with the extension, especially since a year remains on the original Internet taxation moratorium.

"Our concern is if you kick the can down the road for another five years," says White House press secretary Joe Lockhart, "Congress, the states and all the affected parties will find a way to put off the tough decisions that need to be made as to how states and localities handle sales tax and their own tax issues."

--Posted May 19, 2000