The E-Tax Issue: Time Is Running Out

If it feels as if the summer is already racing by, consider how the legislators on Capitol Hill feel. October is just around the corner, and that means somebody has to do something about Internet taxes.

October is the month the current moratorium on Internet taxation expires. Unlike so many other issues our legislators contemplate, the debate over Net taxes has a real urgency.

If the October expiration comes and goes without legislation to replace it, cities and states will have the option to impose their own taxes on Internet commerce.

It is likely that many of them will do just that in an effort to ensure the viability of their own civic coffers. Officials in a number of metropolitan areas in the U.S. have been vocal in their opposition to the ban on Net taxes, which went into effect in 1998.

Slow Going

It is particularly disheartening that we are down to the wire on this issue, especially since the whole purpose of imposing a three-year moratorium on taxes in 1998 was to allow legislators, the e-commerce industry and all involved parties time to study the issue and reach some sort of consensus.

True to form, our elected officials have procrastinated mightily. Those who did take up the issue have been contentious, but largely ineffective in crafting proposals that could ever see daylight.

E-commerce has had a three-year grace period in which to grow unfettered by taxes. During this time, “to tax or not to tax” has made strange bedfellows of elected officials.

Adversaries Unite

None other than Vice President Dick Cheney is on record in opposition to new Internet taxation, though he has been less clear on the issue of online sales taxes.

And just last week, house majority leader Dick Armey said he proposes a “short-term” ban on Internet sales tax. This is risky territory for legislators, some of whose home states claim they will suffer if online purchases are not taxed.

By some accounts, the lawmakers have a point. A recent study from the University of Tennessee predicts that states stand to miss out on up to US$20 billion annually from uncollected taxes from online sales.

E-tax opponents counter such data with suggestions that the complaining states might want to beef up their efforts to attract brick-and-mortar retailers and make it easier for them to operate within the individual states’ commercial landscapes.

All Quiet

Support from Cheney, Armey, et al. is not surprising, especially considering W’s push for tax reductions.

More discouraging, however, is the low number of legislators who have actually voiced an opinion on this topic. That may have to do with a general lack of knowledge and understanding among them about electronic commerce.

Or, it may be that they think the Net taxation issues is a no-win situation.

No Safe Haven

Those who come out against Internet taxation leave themselves open to criticism from back home that they are denying their constituencies much-needed revenues for essential services ranging from garbage pick-up to police protection.

At the same time, if they come out in favor of taxation, they may stand accused of hampering the progress of the emerging e-commerce industries, or of being non-progressive in issues surrounding the new economy.

Therefore, some have simply opted to keep their mouths shut.

Buying Time

Summer months often find legislators distracted and far from the maddening pace of Capitol Hill.It is unlikely a true consensus or compromise on Internet taxation will be reached before the October deadline.

For that reason, it may be best if all involved simply agree to disagree, or at least agree to buy themselves some more time.

The best medicine for the new economy right now would be a reasonable extension of the moratorium. Three more years sounded reasonable in 1998 — and it still does.

On the Front Burner

But this time, elected officials should commit to finding a solution long before the clock runs out again. This is not an issue that can be whisked through governmental roadblocks.

Any bill that shows promise will have to be given a green light by the Senate finance committee, followed by the full Senate and then the White House. It is a laborious process.

The subject of Internet taxation cannot be swept under a legislative rug. It demands more time for consideration, and especially the full attention of those who will decide its fate.

What do you think? Let’s talk about it.

Note: The opinions expressed by our columnists are their own and do not necessarily reflect the views of the E-Commerce Times or its management.


  • The moratorium only applies to “new internet” only taxes. The issue of internet sales tax is well protected by Quill v. North Dakota. The odds of any legislation to overturn the nexus qualifications of this decision are slim if none. The real solution is to streamline the sales tax system to a flat internet sales tax. This will satisfy the states’ greed and ease the cost of compliance for companies. The good news is that by the time you get all the states to agree, the issue will be under the rug again. The real question is, should e-commerce companies be taxed at all? After all, why should my company pay for the boots of a police officer in Houston, TX when I only have 1 contract worker in the state? We have used no state resources, UPS has collected tax for their use of the road, and all I did was take an order through a computer to a server in CA. Why should I have to charge my customer and bear the cost of remittance?

    It does not make sense, the law is antiquated and the states need to learn to tax in new millennium.

    • The US is not alone in the Internet environment, and decisions that state legislators think are in their purview have international implications.

      First, right now, the US is one of the few (maybe the only) nations that sees it as too early to apply the existing tax environment to the new economic environment. If the US does not extend the moratorium, the signal to other countries around the world is that the EU approach is the one to follow.

      Second, the nature of economic exchange is changing rapidly, and the mode of taxation needs to be reconsidered in light of the technological fact. Thus a continued moratorium, but one that induced legislators to consider approaches to streamlining the currently complex environment of state and local taxes, is the way to go. Let the National Governors Association work a little longer on this issue.

      Finally, we must remember that whatever technology gets used to track purchasing patterns so as to ensure that tax is applied is potentially a violation of privacy. Thus, this matter is not just about tax, but also about other policy issues that have domestic and international ramifications.

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