Taxes Won't Kill E-Commerce, Experts Say

Death and taxes. The former is not inevitable in e-commerce, although many online retail sites have met that fate in the past year or two. However, many experts say that taxes on e-commerce are indeed inevitable, as Internet shopping continues to gain in popularity and cash-strapped states look to recoup lost revenue.

Despite concerns from federal officials that taxes will stifle growth of the Internet economy, industry and government observers told the E-Commerce Times that an end to a moratorium on certain Internet taxes will not mean the extinction of e-commerce.

A federal moratorium on new Internet-targeted taxes was passed by the U.S. Congress in 1998, but expired on October 21st of this year. The House of Representatives passed a measure to extend it another two years, but two Senate measures -- one calling for a two-year extension and the other for an extension through June 2002 -- have yet to reach a vote.

With Congress involved in other pressing matters since the terrorist attacks of September 11th, it is unclear when or if the moratorium issue will be taken up. Many experts believe it is not crucial for Congress to act right now, since there are no moves afoot to impose new Internet access or other Net-specific taxes.

Sales Tax Hurdles

A much thornier issue, however, is sales taxes on remote Internet purchases. Currently, consumers buying products and services online are supposed to pay a tax to their home state if the site from which they made the purchase has a physical presence in that state. However, varying tax rates and collection laws prevent states from collecting all the taxes due them.

Donald Bruce, an assistant professor at the University of Tennessee's Center for Business and Economic Research, said state and local governments are seeing a rising toll in lost revenues.

"We've estimated the total loss from e-commerce sales alone to be US$13.3 billion this year," Bruce told the E-Commerce Times. "If Congress fails to act on the nexus (tax collection) issue, that number will only increase as overall e-commerce increases."

A study done by Bruce and Tennessee professor William Fox projects that the loss will rise to $54.8 billion by 2011 if changes are not made.

Seeking Their Share

Bruce said e-shopping's rising popularity makes it necessary to ensure that state and local governments get what is owed them, and this can be done without affecting the overall health of e-commerce.

"The fair and equal application of sales and use taxes to all forms of sales -- local and remote -- would not kill e-commerce," Bruce said. "Indeed, taxes are already being collected on some Internet sales, and growth is still strong compared to overall retail sales growth.

"All that state and local governments are asking for is greater authority to collect taxes that are already legally due. This is based on the simple ideal that sales tax liability ought to be determined on the basis of what's being purchased, not on the basis of how it's being purchased."

Toll on States, Cities

Frank Shafroth, director of state-federal relations for the National Governors Association, said that even before September 11th, state and local tax revenue growth was the slowest since records started being kept in the 1950s, and is in danger of declining further.

Shafroth said re-imposing the moratorium without addressing the collection issue will only cause more damage to state and city budgets.

Shafroth noted that the only new Internet-related tax likely to be levied this year is by the federal government, not states. He pointed to a plan adopted unanimously by the Senate, with White House support, imposing a federal tax on airline tickets to pay for stepped-up security, which applies regardless of whether the ticket was purchased online or over the counter.

"No one could justify that revenue from online purchases ought to be treated differently on an issue important to our national government's ability to pay for critical services," Shafroth told the E-Commerce Times. "No one likes to pay taxes. But if we must, we should have a fair and equitable system that treats all airlines, all retailers, and all consumers by the same rules."

Removing Training Wheels

Andrew Bartels, research leader for e-business at Giga Information Group, said e-commerce is well beyond the point where it needs special protections to survive. Giga estimates that online sales revenues will total $60 billion in the U.S. for 2001, and that the rise of popularity for Internet shopping is attributable to a number of non-tax factors, including convenience, selection and pricing.

"There's no justification for keeping the moratorium," Bartels told the E-Commerce Times. "You're not killing e-commerce by treating all commerce in the same way. The government should not be in the position of creating incentives to buy things online."

Like other analysts, Bartels said the federal moratorium has served to undercut states' efforts to synchronize systems and rules governing how online companies would charge varying sales taxes to customers in different states. This is in spite of the fact that technology exists that would ease this process, according to Bartels.

Please continue to Part 2.