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Analyst predicts extension of e-commerce tax ban

A congressional commission isn't likely to recommend changing the current moratorium, but there will be some form of taxation in the future, says Merrill Lynch analyst Henry Blodget.

A congressional commission isn't likely to recommend changing the current moratorium on taxing e-commerce companies, but there will be some form of taxation in the future, said Henry Blodget, the bullish Merrill Lynch Internet analyst.

The congressional committee considering taxing e-commerce is likely to extend the moratorium at least 3 to 5 years, boosting some online retailers stocks, Blodget said this morning in a call to investors.

The Advisory Commission on Electronic Commerce makes its recommendation to Congress in April.

Top tier companies have the best chance of weathering the effects of any future taxation, Blodget said.

"We think at this point, it's important to hunker down and hold the best ones," said Blodget, adding that, Yahoo, America Online and eBay have the best chances to grow despite the taxation issue.

In October 1998, President Clinton signed the Internet Tax Freedom Act, hoping to give the nascent e-commerce industry a fighting chance. Since that time, e-commerce has grown by leaps and bounds. Forrester Research estimates that online retail sales will grow from $38.8 billion this year to $184.5 billion in 2004. The latter figure represents about 7 percent of the projected total of U.S. retail sales for that year. Blodget said he thinks e-commerce will ultimately account for 10 percent to 15 percent of overall retail sales.

Given those numbers, Blodget said there is enough potential tax revenue that state and local governments should be allowed to get a piece of the windfall. A study late last year by research firm Jupiter Communications noted that the majority of online sales are coming at the expense of sales at traditional stores. This has made state and local officials jittery about the impact on revenues they depend upon to provide services such as schools, roads and public safety.

Taxes are inevitable, said Alan Mak, an analyst at Argus Research.

"There will be a day of reckoning," he said, but "the further away that day, the better," since it will give time for e-commerce to become a part of people's daily lives.

Analysts generally think that once e-commerce becomes widespread, the convenience of shopping online will outweigh the cost of having to pay sales tax.

"Price is important the first time, but ultimately it becomes a matter of convenience," Blodget said.