Ernst & Young: Internet Taxation Can Wait

On the eve of a much-anticipated meeting of federal and state government and private sector representatives to discuss the future of Internet taxation, a widely respected consulting firm said the Internet presents no major threat to sales tax revenues.

The Advisory Commission on Electronic Commerce starts its first meeting today in Williamsburg, Virginia, to study electronic commerce's impact on federal, state, local and international taxation and tariffs. The committee, formed by the U.S. Congress in October 1998, is also charged with presenting a recommendation next April on whether to start taxing Internet sales . Ernst & Young L.L.P. says there is no need to rush into Internet taxation, arguing "the increasing popularity of buying goods and services over the Internet had minimal effect on the collection of sales and use taxes in 1998." In a new study, commissioned by the anti-taxation "eCommerce Coalition," the consulting firm estimates that sales and use taxes not collected in 1998 from Internet sales were less than one tenth of a percent of total state and local governement tax collections. The state and local governments lost just $170 million (US$) in taxes due to Internet sales last year. Taxes Necessary or Nuisance? Many state and local officials have expressed concerns about the possible erosion of their retail sales tax bases, which typically fund such public programs as education and public works projects. On the other side of the aisle, electronic commerce firms complain that the administrative and compliance costs of dealing with different sales and use tax systems and different rates for each state, city and county would be overwhelming and would slow the overall growth of electronic commerce. "The Advisory Commission on Electronic Commerce, state and local governments, and Congress have time to carefully deliberate on the appropriate taxation of e-commerce. There is time to construct a fair, efficient, and administrable tax system for both businesses and state and local governments for the 21st Century," Ernst & Young National Director of Policy Economics Thomas S. Neubig said. Internet commerce is not yet a major threat to tax bases, according to the eCommerce Coalition's reading of the Ernst & Young report, because 80 percent of e-commerce is business-to-business sales that are either not subject to sales taxes or are effectively subject to use tax payments by in-state business purchasers. On the consumer side, 63 percent of online sales are intangible services, such as travel and financial services, or exempt products, such as groceries and prescription drugs, which generally are not subject to state and local sales and use taxes. Finally, 60 percent of all Internet sales are substituting for mail order or catalog purchases, so the buyers are not withholding sales tax revenue from their local communities because they would not have shopped locally for those purchases anyway. Faces of the Committee Representing the states on the Advisory Commission on Electronic Commerce are Virginia Governor James S. Gilmore III, Utah Governor Michael O. Leavitt, Washington Governor Gary Locke, Dean F. Andal, chairman of the California Board of Equalization, Gene N. LeBrun, president of the National Conference of Commissioners on Uniform State Law, and Virginia State Delegate Paul C. Harris. Appearing for the U.S. government are Commerce Department General Counsel Andrew Pincus, Assistant Treasury Secretary for International Tax Joseph Guttentag and Robert Novick, counselor to the U.S. trade representative. County and city governments are represented by Dallas Mayor Ron Kirk and Delna Jones, county commissioner in Washington County, Oregon. From the private sector, AT&T CEO Michael Armstrong, Time Warner Inc. President Richard D. Parsons, America Online President Robert Pittman, Charles Schwab & Co. CEO David S. Pottruck, UUNet Techologies CEO John W. Sidgmore, Gateway Inc. Chairman Ted Waitt, Grover Norquist, president of Americans for Tax Reform, and Stan Sokul of the Association for Interactive Media.