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Commentary: Internet taxes are coming

With the U.S. Congress' extension of the moratorium on Internet taxes in doubt, businesses should prepare to collect and remit online sales and use taxes.

By French Caldwell and Bill Keller, Gartner Analysts

In November 1999, Gartner forecast that by 2001 companies wishing to sell globally online would have to prepare to collect value-added taxes, sales and use taxes, and applicable tariffs and remit them to the countries or jurisdictions in which their products are used or consumed.

With the U.S. Congress' extension

See news story:
Economic, political shifts revive calls for e-tail levies
of the moratorium on Internet taxes in doubt, this forecast will likely prove accurate.

Although the moratorium was not a complete ban on collecting sales and use taxes from online transactions, the ban worked in combination with Supreme Court decisions that prohibit collecting catalog sales tax on out-of-state sales to deter states from instituting online sales tax collection.

Even if Congress does reach agreement to reimpose the ban, it will likely do so for no more than two years, which would likely provide enough time to simplify the states' sales tax systems. Rationalizing sales and use taxes across the 45 states that collect them would establish a basis for federal legislation that would permit states to collect sales taxes outside their territorial jurisdictions.

The elimination of the ban also means that states could consider taxing Internet service--imposing, for instance, a "bit" tax or a usage tax collected by Internet service providers. Other Internet infrastructure-related taxes could emerge as well with states struggling to close budget shortfalls in a sour economy exacerbated by a terrorism-induced, shop-at-home attitude.

States will find themselves under pressure to make up for reduced federal spending on social services, the environment and possibly education, as federal money shifts into defense and homeland security programs. In this environment, state and local governments will need new sources of revenue.

Gartner believes that Internet taxes will begin to take effect in some states as early as 2003 and in most states no later than 2005. Businesses should prepare to collect and remit online sales and use taxes, and companies and consumers should prepare for the increased costs of Internet service.

(For a related assessment of the Internet sales tax issue and its effect on e-commerce, see Gartner.com.)

Entire contents, Copyright © 2001 Gartner, 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.