Net firms concede need for taxes

That explicit concession positions the industry to actively influence all kinds of Internet legislation--and could ease the way for states to collect sales taxes catalogs more easily. An advisory panel to California Governor Pete Wilson suggests the same rules apply to online sales as to catalog retailers.

CEOs of major Net retailers--including eToys, auctioneer Onsale, Disney's Internet unit, Yahoo, and Excite--signed off on the tax recommendations.

The issue is partially moot for now, because the federal Internet Tax Freedom Act bars new taxes specifically on online companies, but the report seeks to influence a national debate on how Net companies will be taxed once the three-year moratorium expires.

"This was not a political or self-interested thing, as you can see by the fact that we didn't say we shouldn't be taxed, but to do it in a fair and equitable way," Onsale CEO Jerry Kaplan said in an interview.

However, beyond the taxation issue, the report hewed to the industry line that consumer protection and privacy issues should be addressed through industry self-regulation, not legislation.

"A proactive stance on the part of the industry to be vigilant in protecting, and even to establish, consumer rights is only going to serve the growth of the industry," said Excite CEO George Bell. "If we don't do it well, we are in for hard times in the industry." Bell argued that the Internet is moving too fast for any government entity to craft appropriate regulations.

In explicitly putting online retailers in the same category as catalog firms, the report could boost the decades-old efforts by states to collect sales taxes on catalog purchases. In the past, the catalog lobby has effectively derailed those efforts, claiming that it is complicated and costly to collect for every locality in the country.

Today catalog companies pay sales tax only in states where they have operations, or "nexus" in legal language. Kaplan said online retailers often use the same guidelines.

At the national level, a 19-member committee is being created to make recommendations on Internet taxation after the three-year moratorium expires. Lobbies for state and local governments have objected that appointees are stacked in favor of the Internet industry.

But if that body equates catalogers with Internet merchants, it could boost efforts by state tax authorities, said a source familiar with the advisory council's deliberations: "The states might ultimately see themselves as winners." Ironically, all but four or five governors opposed the Internet Tax Freedom Act.

"A lot of it comes back to posturing," e-commerce analyst Ken Cassar of Jupiter Communications said about the California report. "Six months ago, Internet retailers were hoping they didn't have to pay sales taxes at all. As states begin to notice the size of e-commerce, there's increasingly a risk that they could be taxed more than catalogers, so they dug the trench a little farther back."

The California Internet report also urges California authorities to consider lifting sales taxes on all digital products, including software and music sold on physical media. That recommendation would have widespread impact beyond the online world--and cost California a significant sum of tax money.

Goods delivered electronically are not taxed in California, and the report argues that puts physical merchants at a disadvantage if music CDs are taxed but music downloaded from the Internet is not.