|(Chairman & CEO, The Carpe Diem Group, Inc., a diversified IT professional services firm providing Internet and e-commerce services and solutions to medium and largesized businesses.)Ronald Reagan characterized government behavior in society by these short phrases: “If it moves, tax it; if it continues to move, regulate it; if it stops moving, subsidize it.” These maxims are still relevant today as governments’ role in the Information Age is rearing its ugly head again with the notion of taxing the Internet.The title question is challenging because it is a bit ‘loaded.’ Americans’ overt sense of fairness and justice generally motivates them as lay people to immediately respond in the affirmative — “with liberty and justice for all,” etc. The question also presumes that there currently exists some special tax-free carve out for Internet purchases where there is none.That said, the direct answer is: No; consumers should not, at present time, have to pay sales and use taxes on Internet purchases, and for two good reasons. First, there is no demonstration of need — the catalyst behind ah government revenues; there is also significant independent data showing the negative economic impact of taxes on e-commerce. The second reason is a simple matter of fairness. Online vendors (e-tailers) should expect the same rules as other remote sellers. Much to the regret of e-tax proponents, the US Supreme Court has upheld those existing rules with respect to their impact on interstate commerce. In short, the Court upheld the notion that, in order to be taxed, the taxpayer should have at least some connection or influence over the tax collector.There are many ways to tax the Internet (e-taxes). This article focuses on the area e-tax proponents usually attack first, sales and use taxes on Internet pur-|
|No!income tax system, except there is only one federal government and fifty states. In terms of sales taxes, the states collected about $150 billion in 1999, equaling almost a third of their total revenue. Lost sales taxes due to Internet purchases were estimated to have cost government only a small portion of that total… about $525 million. However, some estimate that a huge growth in Internet retailing could result in a sales tax loss of as much as $10 billion by 2003.However, some estimate that a huge growth in Internet retailing could result in a sales tax loss of as much as $10 billion by 2003.Of particular concern to traditional retailers and state and local governments, including prominent conservative Republican Governors Michael O. Leavitt (R-UT) and John Engler (R-MI), is the lack of a level playing field proposed by the Commission and lost revenues to the states. Governor Gilmore argues that the Commonwealth of Virginia is creating thousands of jobs and billions in new tax revenues thanks to our growing technology industry. His claims are valid but, to the extent these companies are basing their Virginia investments on retail sales they generate and taxes they don’t pay. Governor Gilmore’s logic is misplaced.The miracle of the Internet is information and communication, not its role as a sales engine. The public will always be wary of purchasing goods they can’t see or touch from people they don’t know or can’t locate in person. Brick-and-mortar businesses recognize the value of customers coming into their stores, gaining the expertise of sales personnel they can talk to and get to know, or people who seek medication advice from their neighborhood pharmacist they know and trust. Internet sales don’t offer this.It just makes plain common sense that if our states garner one-third of their revenue from sales taxes and decide to impose them, that all retailers, whether selling via catalogs, telephone, showrooms or the Internet should pay the same tax rate. But why didn’t this argument take hold with the Commission? For one.||latory complexity for consumers and businesses. E-taxes in the US will definitively make the US less competitive internationally and dampen Information Age growth. Moreover, equal enforcement would be nearly impossible and a law which cannot be equally enforced damages the population governments are obligated to protect.Economists say we are only in the early years of a many-year economic cycle, diminishing international competitiveness early in the cycle has dramatic longterm consequences.3) E-Tax Supporters Mischaracterize the Issues & Benefits — The e-tax supporters fundamental arguments are ‘fairness,’ and lost revenue governments need. Each of these cornerstones is fatally flawed and in direct opposition to the facts. Specifically:• Internet retailers (e-tailers) are treated the same as any company making catalogue sales: specifically, they must have a physical presence in a state (the legal term is “nexus”) to charge sales tax. The only difference is the Internet empowers e-tailers to be more successful than traditional catalogue retailers. Subsequently, the e-tax advocates believe this advantage is, somehow, ‘unfair.’• Fairness dictates any tax must be reasonably related to the services provided by the government. But, e-tailers, like catalogue sellers, do not make use of the public resources like roads, sewers, police and fire services in the states where their customers reside.• When consumers purchase products and are not required to pay sales tax, there is an archaic levy called a ‘use tax’ that some jurisdictions ask consumers to pay voluntarily. However, as Virginia Governor James Gilmore recently noted, it is usually ignored by both consumers and governments and is difficult, if not impossible, to enforce. This is true with e-commerce as well as with traditional, brick and mortar sales. Fairness is not the issue; an out-of-date and silly tax is the issue.Now, let’s review the tax revenue issue.|
|the retail industry was not really represented. Retailers are often too busy with massive chores of buying and maintaining inventory, marketing and selling their products, while fighting to earn a measly 2% to 4% profit margin on huge sales volume. The Internet Tax Freedom Act passed by the Congress in 1998 also played a major role. The Act set up the Commission and as a result, criteria for appointments led to it being pretty well stacked with high-technology business operators and politicians. In fact, while the underlying statute called for small business or retail representation on the Commission, none was appointed.A Commissioner and former Capitol Hill colleague, Stan Sokul, presented a more critical reason why the states did not hold sway during Commission deliberations. He now represents the Association for Interactive Media and argued that, “if the states can simplify, they would gain a lot more credibility when they argue that they should get nationalized tax power.” In essence, the inability of state governments to reach a consensus over the years on harmonizing their various tax laws and coming up with a simplified way to track and fairly tax cross-border transactions, neutralized their ability to sway a majority of the Commission.One clear example of this gridlock is the “use tax.” This tax exists in over 40 states and requires taxpayers purchasing goods from businesses in other states to pay use taxes to their home state when the goods exceed certain values. The Commission “unofficially” failed to recommend repeal of this tax that almost every American fails to pay. Governor Gilmore was quick to use this point in speeches about Commission deliberations, justifiably stating that, “I want to decriminalize the American people who are buying goods and services over the Internet.”While the states are again trying to simplify their intrastate tax policies, each month that goes by without success justifies another month of the current Internet tax moratorium. There is plenty of blame to go around for the failure of the Commission to gain a real consensus.Finding a Solution||Whether a consumer purchases goods or services via a telephone, a catalogue, the Internet, or in person at Kmart, sales taxes should be levied and col-• The National Governor’s Association (NGA), an e-tax advocate, reports states collectively took in $11 billion more than they needed in 1998, and additionally, had $36 billion in surplus cash. Since 1988, sales tax revenues have continued to increase. Governments are already over-collecting while surpluses continue to rise. The Federal government’s surpluses are even larger. When governments knowingly and constantly have surpluses, they are engaging in profit making.Approximately 80% of Internet transactions are business-to-business (B2B) which are predominantly sales-tax exempt meaning any e-tax will generate less than 1/100 of 1% of increase for state and local governments.• Approximately 80% of Internet transactions are business-to-business (B2B) which are predominantly sales-tax exempt meaning any e-tax will generate less than 1/100 of 1% of increase for state and local governments. E-Commerce Advisor, an industry on-line publication, predicts this market share will not change significantly in the near future. Further, according to the US Department of Commerce, on-line business-to-consumer (B2C) sales accounted for a scant .64% of all retail sales in the fourth quarter of 1999, in other words, 99.32% of all B2C retail transactions are still with brick & mortar companies.Of that .64% of retail that is on-line B2C, 72% are non-taxable or already taxed exchanges including online banking, airline tickets, hotel reservations and/ or stock transactions, according to the Greenfield Online Digital Consumer Shopping Index. This means the total target size of on-line B2C transactions for e-taxes is .18% of all retail sales.Sixty-percent of all persons who will not consider making an on-line B2C purchase avoid it because of|
|Also remember the words of former House Speaker “Tip O’Neil that “all politics are local.” I’m not looking forward to a splintered and weakened business community, or a dangerous cat-fight between retailers and high tech companies. But when it eventually comes via unfair competition or the inability of state and local governments to simplify and streamline sales and use taxes, let’s just hope that those who would use it as an excuse to levy even more onerous taxes or devise new taxes don’t step in and ruin it for everyone.The excesses, rhetoric and missed opportunities of the Commission on Electronic Commerce may result one day soon in the proverbial “throwing the baby out with the bathwater.” That often happens when government is asked to step in and take charge. Lets hope that the miracles of the Internet and our new technological freedom are not crippled by trying too hard, to do too much, too quickly, for one new, innovative and favored sector of our business community and economy. This is “industrial policy” at the federal level pure and simple … something conservatives have opposed for decades. It is sad to see some of our conservative leaders now promoting “industrial policy.” What industry will be next? And what will these “good conservatives” say in opposition? “Oh, the Internet is different!” It simply won’t wash.||precise role in the Information Age and subsequently, act to protect and preserve the old way of doing business.Pragmatically, two special-interest groups have formed an odd coalition: businesses without an e-strategy wanting protection and state and local governments which, with limited analytical resources, perceive the Information Age and e-commerce as a way to further fill their coffers.In reality, each group will be better off dealing with the healthy competition capitalism creates and using e-commerce as a catalyst for new, more creative directions. If businesses supporting e-taxes devoted as much time and energy on creating and executing an e-strategy, they would be much better off. If governments devoted as much time, energy and money reducing surpluses, fostering environments that allow the Information Age to continue to flourish and replacing 100-year old policies with modernized, Information-Age friendly policies, citizens would be better served. Governments must adapt to an Internet-based world and Information Age economy to even modestly fulfill their moderate-term objectives.In summary, the benefits of any decision, including tax decisions, should out-weigh the costs. The Internet has been a primary catalyst in the Digital Revolution launching the Information Age. The economic and social impacts have been monumental on the history of mankind. Yet, we are far from maximum potential. The magnitude of change has only begun. Threatening the greatest economic boon to mankind in its infancy with two of the most dreaded tools of government, taxes and regulation, is akin to the Biblical story of ancient Pharaohs executing all male infants under the age of two because one of them might change the status quo.|
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