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Commentary: Assault begins on federal Web sales tax moratorium

Although California's governor may still veto the Internet tax bill coming to his desk, the bill may be the opening salvo on the federal moratorium on new Internet taxes.

By French Caldwell, Gartner Analyst

Although California's governor may still veto the Internet tax bill coming to his desk, the bill may be the opening salvo on the federal moratorium on new Internet taxes.

In California, sales of goods over the Internet are treated as sales of tangible goods and are subject to the rules of "nexus" and California's sales and use tax.

See news story:
California lawmakers OK Net sales tax bill
In the case of retail sales, when a California resident buys goods over the Internet from a retailer that maintains a physical retail presence in the state, sales taxes are collected.

However, to compete with e-tailers such as, many brick-and-mortar retailers have established separately incorporated e-tail operations. In this case, the new e-tailers are building off the brand name of the parent and may share other corporate functions such as marketing, advertising and buying. Besides allowing brick-and-mortar companies to get around their own internal cultural and corporate barriers, the independently incorporated e-tail outlets have the added advantage of being "tax free."

Bill AB2412 is an interesting attempt to rein in those e-tail outlets of brick-and-mortar companies. The proposed law extends the concept of nexus, which up to now has been dependent on physical presence within a territory, to include branding and other intangible relationships that may tie an e-tailer to a brick-and-mortar parent.

Although California's governor may veto AB2412, this bill is definitely the beginning of an assault on the federal moratorium on new Internet taxes. The U.S. House of Representatives has extended the federal moratorium beyond its current sunset of October 2001, but passage in the U.S. Senate is less sure.

Whether California's bill becomes law, other states will likely attempt similar legislation. The growth of online sales and the potential erosion of the sales tax base, which is being masked by a good economy, is too much of a threat and an opportunity for the states to ignore. Regardless of the extension of the federal moratorium, this issue will be ultimately decided in the courts. Alternatively, but less likely, under its power to regulate interstate commerce, the U.S. Congress could settle the issue through national sales and use tax simplification.

(For related commentary on why IT consultants may be only somewhat interested in legislative issues affecting the IT industry, see registration required.)

Entire contents, Copyright © 2000 Gartner Group, Inc. All rights reserved. The information contained herein represents Gartner's initial commentary and analysis and has been obtained from sources believed to be reliable. Positions taken are subject to change as more information becomes available and further analysis is undertaken. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of the information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof.