Post Seattle, net tax wrangles continue

Arguments for e-commerce and software being tax free were prepared for the WTO meeting by vendors like Microsoft, even if the battle of Seattle prevented their being considered. But this week, a more balanced assessment is being made about the need for a tax on Internet transactions, which mostly escape state and local taxes. One of the gritty issues facing the Advisory Commission on Electronic Commerce is to think through how Internet commerce could be tax-free, yet the tax money needed could be raised. ACEC meets today and Wednesday in San Francisco. In many ways, the arguments about a tax on web commerce replay the issues raised in the US by out-of-state purchases by mail order. It took a Supreme Court decision in 1992 to decide that sales tax on mail order sales could only be collected if the seller had a substantial physical presence in the state. With 46 states and many cities having a sales tax, mostly in the 5 to 9 per cent range, there are more than 6,000 sales tax jurisdictions. There is a legal obligation for those in other states to pay a use-tax on goods and services bought out-of-state, but this is hardly ever enforced. Internet-based merchants nearly all want to keep the Internet tax-free, but there are objections from the bricks-and-mortar traders. There's also a need to obtain tax revenue to pay for essential local services like schools, the police, the fire service, and municipal expenses. Between a third and half of the taxes of states and cities have come from sales tax in the past, but the amount is likely to decline as a result of tax-free Internet sales. Estimates vary widely as to how quickly the Internet would result in a significant erosion of the tax collected, except that it will be billions of dollars in two or three years' time. Some organisations, like Amazon.com, which moved from New York to Washington state, have changed their physical location to take advantage of a lower tax regime. Other companies are ensuring that their Web presence is through a different company, so that their physical presence in many states will not necessarily result in a sales tax in the future. ACEC was set up by Congress last year, and is supposed to report by 1 April, but there is already some doubt as to whether the 19 members, under the chairmanship of Virginia Governor James Gilmore, will reach any agreement by that date. If not, Congress itself could take over the matter, or give ACEC more time - and the betting is that the latter would be more likely in election year. The argument is being made that a tax-free Internet favours the rich, since most wealthier households have Internet access. This is not a very convincing argument since local kiosks would soon be established by traders, so that anybody could place an order there, and pay with cash as an alternative to plastic. Another scenario is the possibility of a local Internet business agent receiving a commission on sales that were forwarded, as happened with catalogue sales. If it is decided to introduce new legislation for a sales tax on inter-state trade, there are some formidable technical issues to be resolved. Tax-free havens would quickly spring-up offshore, and it would be ironic if Cuba became one of them, following a relaxation in US-Cuban relations - Cuba Libre would have another meaning. Considerable infrastructure would be needed to collect tax on goods coming into the US from these tax havens, something that would prove to be politically undesirable for any party, especially in election year. A radical decision would be to abolish sales tax and introduce an alternative, but this appears unlikely since it would be so easy to enact legislation to oblige online merchants, or more probably the credit card companies, to send the tax collected in exchange for a commission. There would be some wailing over the complexity of local taxes, but reform is possible. The Washington Post yesterday cited clothing as an example: nine states exempt clothing from sales tax, and in eight of them a shoelace is classified as clothing, except in Texas. There would need to be a big database for all this, but it does only have to be built once and then maintained. At the ACEC deliberations, state and city officials will lock horns with mostly Republicans, activists against tax, and Internet traders. Gilmore will be advocating permanent tax exemption because he sees e-commerce as a driving force in the US economy. There will be an organised opposition through the E-Fairness Coalition, composed of those with an interest in bricks-and-mortar, such as retailers like Wal-Mart and shopping mall owners. Gateway has recently separated its in-store activity into a separate business in anticipation of tax regime changes. In Europe, where there is supposed to be free trade, customs duties are used to penalise purchasers of some of the better things in life. Sales tax - value-added tax - is charged on trade between EU member countries, which has resulted in complaints about non-EU suppliers of goods and services having favourable treatment. The clear winners are going to be the delivery services, and those who set up local Internet service centres for placing and receiving orders - a natural evolution of the Internet café. ®