The E-Commerce Tax Bottom Line

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.

“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 butensure 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Andrew Bartels told the E-Commerce Times that the argument that taxes will stifle the growth of online commerce is no longer valid.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.


  • We have enough taxes. It’s time to simplify. And the government has to learn to live with its budget. Taxes are a method of redistributing money. Taxes take dollars from one person and distribute them to someone else. The less taxes an economy has, the healthier it will be. Sales tax also puts an unfair burden on the lower and middle classes. Some states don’t have a sales tax. If the states want more money, they can implement or increase their state income tax and can the sales tax altogether. The collection problem is too costly to figure out. Administration will be an additional expensive problem. The federal government has more important things to do. Save us all time, energy and money and increase an existing tax revenue source instead of creating a new one.

  • I buy a lot of products online. I AM a college student, so I try to save money buying online. The prices of merchandise online are lower than a retail store, but you still have to pay to ship the item. Most often you’re only saving money on tax and maybe a couple of bucks off than going to a store. If they start charging sales tax, then there is little incentive to buy online. I buy out-of-state just so I don’t have to pay tax, and I know many people that do the same. If I have to pay the full price like at a brick-and-mortar, then I will just go to the brick-and-mortar.

    • Convenience, convenience, convenience. I AM too busy to go running off to the store all the time. I AM more than happy to shell out a couple of bucks for the ability to buy online.

      • I do not have a problem with sales tax online. I have my own Web-based business. We already collect sales tax all over the U.S. All of that is done for us by the Website. Anyone interested email me and I will let you know how we do it.
        [email protected]

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