Internet taxes? It's just a matter of time

CNET News.com's Charles Cooper explains why the push to collect sales taxes for goods offered online is gathering steam.

Charles Cooper Former Executive Editor / News
Charles Cooper was an executive editor at CNET News. He has covered technology and business for more than 25 years, working at CBSNews.com, the Associated Press, Computer & Software News, Computer Shopper, PC Week, and ZDNet.
Charles Cooper
3 min read
When the Supreme Court in 1992 exempted out-of-state mail order retailers from collecting most sales taxes, the online world was still waiting to be invented.

In fact, the court's decision did not even mention the word "Internet." No mystery. At the time, Marc Andreessen was wolfing down cheeseburgers with his buddies at the University of Illinois at Urbana-Champaign while other future cyberstars such as Jeff Bezos and Pierre Omidyar were just ambitious nobodies.

The cybergeneration's period of grace comes with an implied statute of limitations.

Then a dispute between a mail order office equipment maker called Quill and the state of North Dakota scrambled the rules of retail competition. Like many a direct marketer, Quill had no physical presence or personnel in North Dakota. Always on the lookout for new tax revenue, the state government decided to change its definition of "retailer" to include out-of-town mail order outfits. So when the local tax man came knocking, Quill sued.

The Supreme Court came down in favor of Quill, writing a decision that by extension proved to be a boon to the sundry e-start-ups populating the high-tech landscape later in the decade. With their lower cost of overhead, many Internet-based companies, such as Amazon.com and eBay, went on to thrive.

The $64,000 question is whether all these cyberphenoms would have failed had the Quill decision not gone their way. Sort of like asking whether Muhammad Ali could have taken Rocky Marciano--a great topic for bar bloviation but impossible to answer definitively.

Thirteen years later, Internet retail is far removed from its fledgling beginnings. Online retail exceeded $65 billion last year. But success may exact its own cost. Because times have changed, there's now a move to get rid of protective rules that critics condemn as outdated.

Some estimates reported by The Washington Post put the total lost state revenues from untaxed Internet sales in the neighborhood of $16 billion in 2003. With states under increasing pressure to make ends meet, governors are hard-pressed to understand why Internet retailing should any longer qualify as a special case.

That's inspired a move to roll back the freebies. Earlier this month, for example, tax collectors from 18 states announced an interstate agreement on uniform sales tax regulations. They also pledged to supply businesses with software to help them collect taxes online. After so many years, these folks say, it's time to let the Internet industry stand on its own two feet.

They can expect a fight. Powerful groups know how to work the system to their benefit. Unsurprisingly, previous demands for the mandatory collection of sales taxes on mail and online transactions have gone nowhere. Even though pro-tax bills got introduced in 2000 and 2003, neither made it out of committee for floor votes in the House or Senate.

I suppose the tech industry's lobbyists can always fall back on the argument that e-tailers would face an undue burden on interstate commerce if compelled to comply with a multiplicity of state tax laws. But the cybergeneration's period of grace comes with an implied statute of limitations.

The Supreme Court's Quill decision included a hint. Writing for the majority, Justice John Paul Stevens said that "the underlying issue is not only one that Congress may be better qualified to resolve, but also one that Congress has the ultimate power to resolve."

Translation: The clock is ticking.