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The E-Commerce Tax Bottom Line

By Keith Regan
May 6, 2002 7:10 AM PT

Although e-commerce can breathe a bit easier now that a long-standing moratorium on blanket online taxes has been extended, most observers say there will be little more than a brief pause before the battle is joined again.

The E-Commerce Tax Bottom Line

"It's inevitable," Forrester Research analyst Christopher Kelley told the E-Commerce Times. "Now it's just a matter of 'the devil in the details' as to how it happens."

Matter of Time?

While there were some nervous moments for e-tailers when the online tax moratorium expired last fall, President Bush quelled companies' fears by signing a bill extending the ban.

Traditional retailers and states strapped for tax revenue continue to lobby lawmakers, however, saying that e-commerce is enjoying government protection and an unfair advantage. Their efforts all but ensure that the issue will be revisited, according to analysts.

Meanwhile, as time passes, one of the main arguments for not taxing online purchases may be losing some of its merit.

Tax opponents have long argued that the industry is still getting its feet underneath it and would collapse under the weight of additional costs. They also have cited the operational challenges e-tailers would face in administering and paying taxes to various jurisdictions.

That argument seems to lose some of its punch as e-commerce matures and continues to capture a larger share of consumers' wallets. Even though online sales still account for only about 1 percent of all retail purchases in the United States, a recent University of Tennessee study argued that states lost US$13 billion in tax revenue to online sales in 2000.

Tough Enough

Giga Information Group vice president and senior analyst Andrew Bartels told the E-Commerce Times that the argument that taxes will stifle the growth of online commerce is no longer valid.

"You're not going to kill e-commerce by treating all commerce equally," he said.

"That argument was valid for about the first six months," GartnerG2 research director Mike McGuire told the E-Commerce Times. "It just doesn't hold water anymore."

Chilling Commerce

McGuire pointed out that online consumers are not motivated by price as much as was once believed. In fact, he said, people often cite convenience and selection ahead of cost when listing their reasons for buying through the Web.

According to McGuire, it is the states that must get their acts together before a tax can be levied.

But with more than 35 states already on board for a harmonization effort, it will not be long before the online tax debate falls back into the laps of lawmakers.

McGuire said that 2004 or shortly thereafter is a likely time for passage of some form of online sales tax.

Collection a Problem

A bigger problem, especially for smaller niche e-tailers, may be the collection and handling of online taxes.

"Until the states can get together on how it's going to work, online retailers have a very good argument against those taxes," McGuire said.

"They can ask, 'How am I supposed to meet six or seven thousand different tax regulations?' Until they have a single platform to move forward with, it won't happen."

Even when the tax man finally cometh, consumers will not turn their backs on buying online, Forrester's Kelley said.

"So many people have adopted online shopping, it's just not very likely that they're going to stop doing that just because it costs a little more," he noted.

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