Economic, political shifts revive calls for e-tail levies
By Troy Wolverton
Staff Writer, CNET News.com
October 30, 2001, 4:00 a.m. PT
After years of largely unregulated commerce, Internet retailers and consumers are hearing a dreaded message: Beware the tax man.
Now that the U.S. federal government's three-year tax ban has expired, the
days of the Internet as a practically duty-free zone may be numbered.
Although Congress could still reinstate the moratorium, the door to tariffs is starting to open.
"I think in the short run, the expiration of the moratorium is a non-event," said Tom Steele, co-chairman of the state and local tax group for
San Francisco-based law firm Morrison & Foerster. "The real import here is a political one. The expiration of the old act changes the political dynamic of the new one."
The reasons for the change in the wind are many and diverse.
First, the economic slowdown has drained tax revenues from state, county and city coffers. Second, local governments have become less concerned about thwarting the burgeoning Net industry since the dot-com bust. Third, the line between traditional retailers and online companies has continued to blur with wider acceptance of the Internet to buy and sell goods. Finally, some believe that the Sept. 11 terrorist attacks distracted Congress from routinely extending the 1998 Internet Tax Freedom Act and allowed tax supporters to gather momentum.
For the moment, consumers need not worry that online taxes will cut into their holiday shopping budgets. Even if state and local governments win the right to impose new Internet taxes, they would be unlikely to do so for at least several months because it is such a massively complicated issue. But recent actions involving the federal moratorium suggest that some form of Net taxation is inevitable.
After the House passed a two-year extension of the moratorium Oct. 16, several Senate measures that would have extended the ban were blocked by last-minute legislative maneuvering. Both sides appear unwilling to concede, and the possibility of an extension remains in doubt as Congress winds down its current session.
Instead of discussing how long the ban should be extended, the debate has changed to whether it should be extended at all and, if so, at what price.
An abrupt reversal
"It's very likely that this thing expires and stays expired," said Stan Sokul, legislative consultant for The Direct Marketing Association, which is pushing for an extension of the moratorium without it being linked to the sales tax issue. "There's at least a 50-50 chance."
That would be an abrupt reversal of a hands-off policy that has been in place since the Internet became a mainstream avenue for retail sales. Tax proposals have been shut out of the Internet because of two key legal protections, one by the courts and one by Congress.
In general, e-tailers have been covered by the 1992 Supreme Court case of Quill Corp. v. North Dakota. The court barred state and local governments from collecting taxes on most "remote" sales in that case, ruling that it would be unreasonable to force mail-order and catalog sellers to collect sales taxes in the thousands of jurisdictions around the country where they don't have a substantial presence.
Many state and local governments have opposed the Quill decision as a usurpation of their taxation rights under the Constitution. The matter might have been laid to rest, except the court gave Congress the option to write a law that would permit states to tax remote sales.
The Internet was further shielded from any such moves in 1998 when Congress approved the Internet Tax Freedom Act, which expired Oct. 21. The act barred for three years taxes on Internet access and special "discriminatory" taxes on e-commerce.
The federal law left open the possibility for Net taxes at a later date and created the Advisory Commission on Electronic Commerce to study the issue. But deep divisions on the panel prevented it from making any formal recommendations when it concluded work last year.
To be sure, the Internet is not entirely tax-free. States can charge sales tax on e-commerce transactions between companies and consumers within their borders. Seattle-based Amazon.com's Washington state customers, for instance, must pay Washington's sales tax.
States also can charge a "use" tax--the flip side of a sales tax--for goods bought from out-of-state retailers. Although most have encountered obstacles to imposing that tax, states such as Ohio in recent years have added a line to their state income tax forms requiring citizens to calculate and pay such levies.
In addition, the Internet Tax Freedom Act did not affect laws enacted previously by several state and local governments to tax Internet access. Still, the majority of local jurisdictions do not impose Net taxes, and fiscal concerns have increased as the economy has headed south.
An ongoing survey by the National Conference of State Legislatures estimates that at least nine states face budget shortfalls this fall. With every state required to balance its budget, many will be forced to find new sources of revenue or to cut services.
"If you are a state and you want more money, Internet access is a very juicy target," said Grover Norquist, president of the anti-tax group Americans for Tax Reform. "It's been protected for three years."
On top of the economic downturn has been the rapid growth and evolution of the Internet. Tax proponents believe that the medium should be treated more like its predecessors in retailing and entertainment as its uses expand in the mainstream public, where more than 50 percent of Americans now have Internet access in their homes.
Amazon, the epitome of the e-tail start-up, has deals with offline stalwarts such as Toys "R" Us, Circuit City and Borders and is expected to gross more than $1 billion in sales this quarter. America Online, meanwhile, has gone from being the nation's largest Internet service provider to the world's largest entertainment company after its merger with Time Warner.
|Gartner analysts French Caldwell and Bill Keller say that 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.