Interesting Read Courtesy of a Lurker..On the Internet & Taxes.........
To: ztect@hotmail.com
Subject: Taxes on the net
Date: Sun, 11 Apr 1999 21:38:32 -0400 (EDT)
Tax the Net!
March 23, 1999
by Norm Alster
Electronic commerce has a dirty little secret: The numerous tax
loopholes and pro-Internet policies accelerating its growth threaten to
drain funding from public education, Medicaid, and other state and local
services. Can the government continue to subsidize the Internet
marketplace at the expense of the brick-and-mortar world? Build a
better mousetrap, the old saw goes, and the world will beat a path to
your door. Building a better tax dodge, however, is probably a surer
route to riches. And what if--as with the Internet and electronic
commerce--you can shield entire industries behind a fortress of
impregnable tax breaks? Massive capital would flow in your direction as
investors, always uncannily alert to tax breaks, abandon the stocks of
your hapless brick-and-mortar rivals. Welcome to the world's widest tax
loophole. No state sales tax. No Internet access tax. A moratorium on
all new taxes for at least three years. This is the privileged paradise
of e-commerce. It is one of the great but unspoken ironies of modern
business that the Web, noted for its vehement anti-government
libertarian ethos, owes much of its wildfire success to a de facto
industrial policy. Mention government action to protect children from
pornography on the Net, and the Ayn Rand chorus starts to howl. Mention
the various government efforts to subsidize the Net, and there are no
protests, just the smug smiles of entitlement. Few, of course, would
deny that the Web brings superior efficiency to communications,
information access and commerce. On its own merits, it would undoubtedly
reshape countless sectors of business. But the Web hasn't competed on
just its own merits. The plain truth is that it has been tax-advantaged.
That's why it is at least arguable that much of the Web's almost
inexplicably rapid growth derives from its favorable political
treatment. These policy decisions have had a profoundly distortional
economic impact, reshaping whole industries and redirecting investment
capital from brick-and-mortar businesses to online businesses.
Meanwhile, the exemption of Web commerce from sales tax has created
numerous victims. The most serious casualties may eventually be state and
local governments--and their residents--that depend on sales taxes to
fund education, Medicaid and other services.
Let's pause for a moment to consider the case of obscure Midvale, Utah, just 17 miles south of Salt Lake City in the Salt Lake Valley. In all the fawning media coverage of triumphant electronic commerce, have you ever seen any reference to Midvale? Unlikely. Because the problems of Midvale reflect the darker side of subsidized Internet commerce. When PC seller Micron Electronics Inc., based in Nampa, Idaho, shut down its retail outlet in Midvale in January 1999 to focus more on online sales, Midvale suddenly lost a projected $180,000 in sales tax revenue. That may not sound like
much. But as Midvale City Manager Lee King explains: "That's 4 percent
of my sales tax revenue that disappeared overnight. You get more than
one of these and it becomes serious." It will get more and more serious for Midvale and other U.S. towns and states as the Web diverts more and more sales from taxpaying channels.
page 2: The E-commerce Boom
By the year 2003, U.S. business-to-business commerce on the Internet
will total $1.3 trillion (up from an estimated $43.1 billion last year), calculates Stuart Woodring, VP of research at Forrester Research Inc. in Cambridge, Mass. Not all those sales--if conducted offline--would be taxable, since only sales to end users are subject to sales tax.
Woodring says a "rough-cut" estimate is that about half of the total
would be end-user sales. That's $650 billion. Add to that the $108
billion in U.S. consumer e-commerce purchases that Forrester forecasts
for 2003--up from $7.8 billion in 1998. At an average sales tax of 6
percent, that's about $45 billion in lost revenue in 2003 for schools,
health care and roads that the states will have to find elsewhere.
And, of course, everyone expects Web commerce to keep growing well beyond 2003. Indeed, the privileged tax status of the Web has set in motion a kind of cascade effect: Tax breaks help e-commerce grow faster, which induces traditional retailers to set up e-commerce operations to compete on equal terms. Just as air rushes to fill a vacuum, buyers and sellers both rush to exploit a tax break.
Where did this tax break originate?
Well, the Web's sales tax exemption does not, as many think,
derive from the Internet Tax Freedom Act of 1998 enacted last October.
It's actually a free-ride piggyback on a 1967 U.S. Supreme Court
decision that exempted mail-order catalog businesses from collecting
sales tax in states where they don't have a physical presence. The court ruled that the collection of such taxes would be a complicated task that would pose an undue burden on the businesses. Net supporters have argued for--and won--a similar exemption. Last year's Internet Tax Freedom Act just aided the cause by placing a ban on new Internet taxes of all types until Oct. 21, 2001. Keep in mind, though, that buyers of both mail-order and e-commerce goods are actually required to pay levies on their online or mail-order purchases when they file their state income tax forms.
Utah Gov. Michael Leavitt says he expects to pay tax on the
sofa his wife recently bought online. But isn't it true, the governor
was asked, that few people actually do report such purchases? "That's
absolutely right," he replied. However, the seller is not required to
collect sales tax if it doesn't maintain a physical presence in the
buyer's state. Micron, for example, began selling on the Web just over
two years ago and already generates about 15 percent of its sales
online. Having recently closed its retail operations in Utah and
Minnesota, Micron is now free to sell computers on the Net without
collecting sales taxes for any state except Idaho, site of its last
retail outlet. And make no mistake about it: The absence of sales tax
is an inducement to buyers. "I think it's a financial advantage to the
consumer. And the consumer is very price-sensitive," says Judith
Bitterli, Micron's VP and general manager in charge of its Internet
business. "I think a fair number of customers buying from a mail-order
or Web-based business do so in part to save on sales tax," agrees Alan
Fisher, co-founder and chief technical officer of Menlo Park,
Calif.-based Onsale Inc., which auctions computer products, travel
packages and other goods on the Web.
When faced with sales erosion to online rival Amazon.com Inc. of Seattle, Barnes & Noble Inc. of New York established its own online operation-- Barnesandnoble.com LLC--and suddenly gained the right to sell without collecting state sales taxes.
Barnesandnoble.com VP of Communications Ben Boyd stressed that the sales tax exemption was not the motive for establishing the e-commerce unit.
It was simply an effort to capitalize on a promising new distribution
medium. But online orders shipped to customers in 47 states (all but New York, New Jersey and Virginia) are tax-free at Barnesandnoble.com. How is it that Barnes & Noble, which has stores in so many states, can escape the burden of collecting taxes online? "We don't advertise and market (the online operation) through the retail stores," explains Boyd.
So while Barnes & Noble emphasizes it did not go online for tax
purposes, it has also made sure that it doesn't run afoul of the rules
on physical location that would require it to collect sales taxes.
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