The Internet And Taxation

The Internet and Taxation

A 19-member panel unknown to virtually all Americans is considering how to tax a virtual world that's home to millions: the Internet. The federal Advisory Commission on Electronic Commerce convened for the first time Monday in historic Williamsburg, Virginia, but the setting is the only thing that's serene. On both sides of the debate, fireworks have been flying for months.

On one side are consumers and businesses that buy and sell on line. Most of their transactions go across state lines, and sales taxes are not collected. They say imposing sales taxes on the Internet could stifle growth in an industry that is helping to drive the U.S. economy, and taxes could drive Internet firms overseas. On the other side are traditional retail merchants who collect sales taxes and the governments that rely on those taxes to pay for police, schools and roads. The retailers are losing business to the tax-free Internet. That cuts into the 36% of state and local government revenue that comes from sales taxes.

The commission's task is to recommend changes to Congress that both sides can live with. It is faced with the current system of more than 3,000 state and local sales taxes. And the products that are taxed, such as food and clothing, vary from state to state. For that reason, the panel, might consider something as radical as a national sales tax. Its recommendations are due to Congress in April 2000.

''America is a world leader in information technology. We are at the cutting edge of Internet commerce, and we want America to maintain that position of leadership,'' says Virginia Gov. James Gilmore, the commission chairman. The debate will affect ''every human being, every potential customer, everyone in their homes who wants to shop for price or look for quality.''

Any final decision on Internet taxes is at least two years away. Last fall, Congress imposed a three-year moratorium, until October 2001, on new taxes on Internet sales.

Consumer sales over the Internet were about $10 billion last year and are expected to top $100 billion by 2003. Business-to-business commerce over the Internet was $43 billion last year and is expected to be $1.3 trillion in 2003.

Convenience and low prices are the main reasons consumers shop on line. Adding a sales tax might not frighten most shoppers away, but on major purchases such as computers a 5% sales tax could add hundreds of dollars to the cost. Internet merchants also say that the hassle of calculating thousands of local sales taxes would be an administrative nightmare.

But the debate is not as simple as whether to tax. Internet and other remote sales, such as mail-order catalogs, are not exempt from taxation when the buyer and seller are in the same state. But the Constitution prevents states from taxing transactions beyond their borders. The Supreme Court has ruled that states cannot require out-of-state companies to charge sales taxes unless Congress passes a law allowing them to do so.

Firms that sell over the Internet have two major concerns about Congress passing a law requiring them to collect sales taxes: 1) how do they collect across 3,000 or more separate taxing jurisdictions with different rates and exemptions and 2) how do they guard against the same sale being taxed several times when transactions often are routed through several states?

Governors, mayors and county officials also have mixed feelings. They must balance their need for revenue to pay for government services against their desire to attract information technology firms and foster economic growth.

The debate comes as a booming economy has many state treasuries flush with cash. But already, government officials are pushing hard for a method of taxing Internet sales across state lines. Without such taxes, their doomsday scenario goes like this: Government revenue will shrink as Internet commerce grows. Downtown merchants will be driven out of business, shrinking the property tax base, boosting unemployment and reducing payroll taxes. Politicians will be left with an unappetizing choice: Raise other taxes or cut programs.

The effect on state and local governments varies greatly. Five states вЂ" Alaska, Delaware, Montana, New Hampshire and Oregon -- have no sales tax. Nine states -- Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming -- have little or no income tax, which can make sales tax revenue even more important. Cities with the highest sales tax rates, such as Chicago and New York, have the most at stake.

During the moratorium, governments aren't losing much by not taxing electronic transactions. Internet sales today represent less than 1% of the $3 trillion retail industry. The big impact is several years away. Still, some officials are bracing for a drop in government revenue.

Harry Smith, mayor of Greenwood, Mississippi, says a 5% drop in sales tax revenue