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Taxing the net: what's next
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March 7, 1999: 9:43 a.m. ET
Internet taxation could be a key debate -- if only the panel could meet
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NEW YORK (CNNfn) - The future of Internet taxes remains unclear. But this much is certain: the Congressional commission studying the issue is off to a rough start.
On Monday, two groups plan to file a lawsuit in Federal District Court in Washington, D.C., to keep the Advisory Commission on Electronic Commerce from meeting.
The groups, the National Association of Counties and the U.S. Conference of Mayors, say the panel's membership favors business interests. This, they fear, could lead to too few taxes on Internet commerce, giving online businesses an unfair advantage over Main Street retailers and crushing local tax revenue.
"This commission is illegal," said Shawn Bullard, spokesman for the counties association. "They should not be allowed to meet."
A taxing future?
Currently, when you buy something on the Internet, you only pay sales tax if the company is in-state. A New York resident purchasing a $50 book from Washington-based Amazon.com (AMZN) saves $4.12 in taxes A Georgia resident ordering a $4,000 computer online from Connecticut-based Cyberian Outpost (COOL) keeps $200.
This may not be good for everyone. "Main Street retailers are competing at a 6- to 7-percent disadvantage," said Randy Johnson, county commissioner of Hennepin County, Minn.
Johnson said lost sales taxes, in turn, must come from other sources. "The results will be higher income and property tax," he said.
Read my lips
In effect, Internet commerce is treated like mail-order catalogue sales. Because states can't easily collect taxes across state lines, out-of-state mail-order sales go untaxed. With taxes a perennial gripping point, plenty live by the mantra: No new Internet taxes.
"There's is no immediate danger of large revenue loss for traditional retailers or state tax authorities," writes Aaron Lukas, an analyst at the Cato Institute, a think tank. "Online retail sales this year (1998) are expected to top $2.3 billion - a mere snowflake in the overall blizzard of retail activity."
In a larger sense, the Internet tax debate has forced its participants to envision a strange, new world where as much as 50 percent of commerce could someday be conducted online.
In this world, Lukas sheds no tears for local governments. "If state and local governments want to tax their citizens more heavily, they still have the tools to do it," he writes. "There will always be income taxes, property taxes, gas taxes, hotel taxes and the like."
U.S. Rep. Christopher Cox, a Republican from tech-heavy California, also likes the current system.
"The law, is aimed at preventing discrimination against the Internet, not giving it a tax preference," he writes on his website.
The law Cox refers to is the Internet Tax Freedom Act. Signed in October by President Clinton, it puts a three-year moratorium on new Internet taxes. The moratorium will be revisited once - and if -- the Internet commission submits its recommendations to Congress.
But first they have to meet.
Commission in limbo
The groups that are filing Monday's suit say that the commission -- with eight executives from places like Netscape Communication Corp (NSCP), MCI WorldCom Inc. (WCOM) and America Online (AOL), and only six members from state and local governments -- is stacked in favor of Internet interests.
"There's no one representing the nation's 1.6 million retailers," said Frank Schafroth, spokesman for the National League of Cities.
The commission's 16 members do in fact include eight people from technology firms and only six from state and local government. The remainder are federal representatives and a private citizen.
The office of Senate Majority Leader Trent Lott, R-Miss., who made many of the commission's business appointments, did not immediately return a call requesting comment.
A booming market
Advocates for expanding Internet taxes point to the predicted boom in electronic sales. While mail order commerce totaled $80 billion last year, and Internet sales reached $9 billion, revenue from electronic commerce is expected to grow much faster than its mail-order counterpart. Last year's Internet holiday sales for example, more than doubled from the previous year. And electronic commerce is seen jumping to $108 billion annually by 2003, accounting for 6 percent of the $1.8 trillion retail market, according the Forrester Group, a Massachusetts researcher.
Those favoring more Internet taxes envision a system where the electronic buyer pays his sales taxes to his home state. Currently, this only happens with vehicle purchases. A Californian buying a car in Oregon, for example, pays taxes upon registering the car in the Golden State.
But unlike the Internet, cars are highly regulated. As such, Internet business types chafe at the complications and hassles involved in taxing purchases from other states. Why, they ask, should that be their job?
Countering, Walter Hellerstein, a professor at the University of Georgia's School of Law, said "that they cannot collect these taxes is simply nonsense."
Sales tax and beyond
The growth of Internet commerce raises all sorts of issues beyond sales tax. How will governments tax online subscriptions? (Currently they don't). What about taxing information that's downloaded? And while Main Street retailers may suffer in a world of electronic commerce, what will happen to retailers doing both types of business? Will Barnes & Noble (BKS) shutter its stores if BarnesandNoble.com does a better business?
If history is any guide, taxes will only increase; they will never stay the same.
Now a national institution, the federal income tax was only initiated in 1913. Since then, tax receipts have increase 175,000 percent, said Pete Sepp, vice president of communications at the National Taxpayers Union.
Still, Sepp thinks the Internet, because of its ungoverned quality, may just keep its current low-tax status.
"This may be the medium that finally beats taxes," he said. "With the Internet, tracking is almost impossible."
-- By staff writer Jake Ulick
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