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Sales tax on e-commerce?

Shopping online has its advantages: You avoid the trouble of looking for parking and dealing with rude clerks in packed malls. And being an e-consumer is easy on the purse since Internet merchants charge no sales tax -- at least for now.

Enjoy it while it lasts because there are forces at work to slap a tax on your Web purchases.

Like any legal and tax issue, this one is complicated. Here's the short version. Like mail order and direct marketing, Internet retailers get away without having to charge sales tax to out-of-state customers. The brick-and-mortar retail crowd claims they are unfairly losing local customers to distant Web merchants because of it. State and local governments are frowning too. They complain they are losing important tax revenue on cyber-sales.

Currently, the whole thing is on hold while a Congressionally appointed commission studies the situation. Some experts predict the federal government will not allow taxes on e-commerce in order to protect this growing industry. Others declare that it's only fair that all merchants get treated the same. Expect an ongoing battle on this issue and a possible change in your bottom line sometime in the next couple of years.

And now for the nitty gritty:

The status quo

Internet shopping enjoys a tax-free status thanks to legal battles involving old-fashioned mail order. U.S. Supreme Court decisions in 1967 and 1992 said that states and cities couldn't make a business collect sales taxes unless it has a physical presence (known in legal terms as nexus) in the jurisdiction. So mail order companies have enjoyed a nearly tax-free ride for decades, raking in millions of dollars in sales and only collecting sales tax for customers in their home state.

In the last couple of years, Internet shopping has exploded and is predicted to continue doing so. E-commerce is expected to make up 10 percent of the gross domestic product within three years, says Craig Barrett, president of Intel Corporation in Santa Clara, Calif.

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In favor of sales tax on e-commerce

Even without collecting on online purchases, sales taxes account for as much as 50 percent of state and local government revenue, which pays for fun things like roads, schools and police.

Taxing Internet purchases would have raised almost $170 million nationwide this year, according to a fall 1999 study performed by accounting firm Ernst & Young in conjunction with the advisory Commission on Electronic Commerce. That's lost money in a government's eyes, but to put it into perspective, it's less than 0.1 percent of state and local government sales- and use-tax collections.

However, Ray Scheppach, executive director of the National Governors' Association in Washington, says tax revenue is not the real problem.

"It's more of an equity issue," he explains. "It goes to the guts of a fair tax system. You can't have a tax system that differs on how you buy a product.

"They [online merchants] have been getting away with a loophole, and it's getting worse," Scheppach says.

The governors' association also has qualms with the digital divide, according to Scheppach. Higher income folks are the ones with computers and online access, and therefore, they have access to these tax discounts. Computer-less folks shop locally and pay sales tax. In all fairness, all consumers and businesses should be treated equally, at least by the government.

Not in favor of sales tax on e-commerce

Opponents of changing the status quo, consumers and e-businesses, are the ones who will be paying the tax or paying to collect it.

Web merchants as well as mail order and direct marketers are afraid they'll lose business if they are forced to collect sales tax. Austan Goolsbee is a University of Chicago economist whose study, In a world without borders: The impact of taxes on Internet commerce, claims online spending would drop by as much as 24 percent.

Additionally, Internet merchants would bear the burden of collecting the taxes. With the current state of sales taxes, this would be an administrative nightmare. In a speech this year, President Clinton cited 30,000 different sales tax regulations from state, county and city governments. Ernst & Young's report says the cost of collecting sales tax in all states would be equivalent to 87 percent of the collections.

"The administrative burden would be outrageous," declares Joseph E. Bender, a Chicago-based tax attorney for Sonnennschein, Nath and Rosenthal.

"The difficulty would arise from an administrative standpoint, having to file and pay the tax separately in every different state," explains Michael R. West, president and chief executive officer of Homepoint, an online furniture and accessories retailer based in Greenville, S.C.

Online shoppers would also oppose a tax. Fair, schmair -- we're getting a discount. What's to complain about? Saving a few dollars on goods on the Internet makes it worth waiting for Web businesses to get their acts together on customer service, shipping and technology.

"The consumer would not have the same incentive to shop online -- other than to avoid crowds," explains Paul Housey, a New York-based tax attorney for Sonnennschein, Nath and Rosenthal.

The federal government is on the fence on this issue. While trying to administer tax laws fairly, Congress also faces the challenge of not stalling the growth of e-commerce.

"We don't want to create laws too quickly, don't want to stifle e-commerce," Bender says. "In five years, who knows what there will be. If you tax the Internet, you slow second-generation growth."

However, on Friday, Dec. 10, 1999, the White House spoke against a permanent ban on Web sales tax. The Clinton administration is promoting a simplification of the current sales tax situation.

Who's working on it?

In 1998, Congress created the Advisory Commission on Electronic Commerce to do the scut work of finding a solution. The group, which includes three Governors, and representatives of the Association of Interactive Media, AT&T and AOL, met for the third time Dec. 14 and 15, 1999, in San Francisco. "Their goal is to come to a consensus," Bender says. "They will make a report to Congress next year." Finding a proposal that's acceptable won't be easy.

"The challenge is to decide who collects and how it'll get done to make sure there's no double taxation and no bureaucratic nightmare," explains Harry Rubin, an attorney and head of the Internet group at Shaw & Pittman in Washington.

And the debate rages on. Even after their third meeting on December 14 and 15 in San Francisco, the ACEC is stalling on making a decision until March 2000. The commission reviewed and discussed many proposals about sales tax on the Internet. However, it remains divided between those led by Utah Governor Mike Leavitt, who insist all transactions be subject to sales tax, and others, led by commission chairman James Gilmore, governor of Virginia, who want the Internet to remain sales-tax free.

The original target for finding a workable proposal was April 2000. But with an election year and such a big issue still up in the air, many expect Congress to extend the period for debate.

A political aside: Republican Presidential candidates John McCain and Steve Forbes are all in favor of banning sales tax on the Internet forever, while others have been silent or neutral on the topic, as is the case with Texas governor George W. Bush.

A moot point after all?

Scheppach says the whole issue will work itself out one way or another.

"Down the road, you're not going to have that many only e-commerce sites," he predicts. "It'll be a blend." He says that as e-commerce companies build physical facilities around the country, they will be required to collect. For example, until recently Seattle-based Amazon.com had to collect sales tax only from customers in Washington state. But with warehouses opening in six additional states, Amazon.com will find itself required to collect more sales tax than ever.

Odds are good we'll eventually see some of our Web purchases taxed. E-commerce and mail order outfits may whine, but they won't die out. Consumers will continue to shop online paying any tax that's required for the Internet's convenience and the occasional bargain. "The sales and growth of online commerce is going to continue to increase whether or not an Internet tax is added," says "Netrepreneur" West.

The silver lining in this cloud of controversy is that in the end, the United States could have a more rational sales tax system as the states end up working together to handle interstate transactions.

-- Posted: Dec. 16, 1999


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