Tax the Net! Continued
page 3: The Right to Sell Tax-Free
Having secured the right to sell tax-free, many industry executives like
to dismiss the importance of this privilege. They argue, for example,
that shipping and handling fees for online sales eat away at the buyer's
tax windfall. But in the time-honored tradition of tax loophole logic,
this argument is somewhat slippery. "Shipping and handling don't begin
to match sales tax [savings on higher-priced items]," notes Aaron
Goldberg, executive vice president at InfoBeads, the Internet research
arm of Ziff-Davis Market Intelligence of La Jolla, Calif. (Goldberg is
also an Upside columnist. See Nothin' But Net.) Indeed, InfoBeads'
research found the tax advantage may be even more important than it
would seem. "People would rather pay more to ship if it means [avoiding]
a tax. It's the psychological thing of beating the tax man," explains
Goldberg. Consider this: Sen. Richard Finan, president of the Ohio
Senate, recalls seeing a huge van pull up outside his neighbor's house
one morning. "You moving?" he asked. No, his neighbor told him, he was
just taking delivery of $25,000 worth of furniture he'd bought on the
Net. Shipping cost? $100. Taxes saved at the state of Ohio's expense?
Around $1,375. Sen. Finan says recent estimates concluded that Ohio will
lose anywhere from $56 million to $165 million in revenue this year from
uncollected taxes on mail-order and Web purchases. And, as mentioned
above, the sales tax advantage has created an insidious dynamic that
actually gives retailers an incentive to close down their storefronts
and move online. Since they don't have to collect Web taxes in states
where they have no physical presence, companies might as well close up
shop to qualify for tax-free status. Also, when retail stores,
factories and warehouses shut down, state sales taxes aren't the only
government revenue streams at risk. For one thing, state sales taxes
sometimes include local levies that are then directed back to cities and
towns. The shuttering of storefronts would likely mean job losses (after
all, aren't lower employment costs one reason businesses want to sell
online?) that would pinch payroll tax collections. In the longer term,
the tax privileges of the Net could even begin to affect property tax
collections. As brick-and-mortar businesses lose customers to the
tax-free Internet, an ever-greater number will follow Micron's example
in closing storefronts. Such a mass exodus would inevitably depress
property values as well as the local tax collections that depend on
those valuations. Barring some broad public consensus to slash the
funding of schools, local hospitals, and fire and police departments,
all these lost tax dollars will have to be raised elsewhere. If other
taxes are levied, whoever pays them will, in essence, be subsidizing the
Web. The prospect of sales moving out of taxable stores and onto the
tax-free Web has begun to worry many state and local officials. "There
is concern about the future erosion of the tax base. Some people are
very concerned about the long-term potential for erosion," notes Scott
Mackey, chief economist for the National Conference of State
Legislatures in Denver. Adds Harley Duncan, executive director of the
Federation of Tax Administrators, an association of state revenue
departments in Washington D.C.: "It's an issue of major concern to the
states. Sales tax accounts for just about half of all [state] tax
revenues." Education, child care, welfare, Medicaid, and roads and
bridges are all typically funded by state sales taxes, which average
around 6 percent. Utah Gov. Leavitt wants to see Web commerce put on
the same footing as other business. "There's quite a serious equity
problem if we don't treat transactions on the Internet the same as we
would those that take place in the shopping mall," he told Upside.
Apart from local government and all manner of retail businesses, the
political pampering of the Web may create other victims. Many European
governments are dependent on value-added taxes, consumption taxes that
can amount to 15 percent or more of a purchase price. Europeans now have
tremendous incentive to dodge these levies by buying online. "If I live
in a country with high value-added taxes, why wouldn't I find a way
around it?" asked InfoBeads' Goldberg. Last summer, however, the
European Commission issued a report calling for value-added taxes on all
online purchases by consumers and businesses based in Europe.
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