Hands Off On Internet Tax Laws

In recent months much has been made of the ease and affordability of buying consumer goods over the Internet, including such items as books, compact discs, and cars. Tapping into Amazon.com and buying the latest Steven King or John Grisham tome saves a trip downtown to the mall, and maybe even saves a few bucks off the cover price.

But what makes electronic commerce transactions even more appealing to some cyber-consumers is that the government, in any form, doesn’t get a penny of the purchase. Unlike a purchase at a physical bookstore, consumers aren’t taxed for goods bought over the Internet.

Industry observers say the government hasn’t figured how to regulate cyberspace yet, let alone streamline a tax process for online consumers. To buy some time, Congress passed the Internet Tax Freedom Act in October that placed a three-year moratorium on new taxes until the Internal Revenue Service can hash things out.

Not only does the bill place tax limits on goods purchased over the Net -- consumers are still liable for paying some local taxes -- it also bars taxes from being levied on online service contracts, like the fee millions of Americans pay each month to use their ISP. Almost every state in the country is unable to press for such taxes. In Ohio, for example, officials say the state has no authority to collect taxes from companies that do not have a presence in Ohio. As a result, the state doesn’t even track Internet purchases.

"Of course we would like to increase compliance on Internet taxes," explains Bill Riesenberger, counsel for Ohio’s Sales and Use Tax Division. "But the problem is those types of purchases are relatively small, and to pursue that on an individual basis is a lot of trouble for not a great return."

Those popping sounds heard in the distance are champagne bottles being uncorked by the growing number of businesses that are engaging in e-commerce. Free to operate in a tax-free zone, and given a three-year window to build a reliable and sustainable consumer base to sell their products and services at lower costs than offline competitors, Internet-based business are rolling in new cash. According to Jupiter Communications (www.jupitercommunications.com), the electronic commerce market is set to grow to $12 billion this year and to $41.1 billion in 2002. Online sales during Christmas 1998 reached $3 billion -- three times more than the same period in 1997.

In some cases, Internet consumers are saving up to 6 or 7 percent from not paying taxes. On a $3,000 personal computer, that amounts to about $200. That’s a big, built-in advantage over a store-bought computer, experts say. "There’s no question that no taxes are a boon for Internet companies -- it’s a classic example of the Internet being ahead of the regulators and catching them by surprise," says Kim Eirman, president of Cyber Solutions Group, an Internet consulting firm located in New York. "It just never occurred to anyone in government what the ramifications would be from Internet commerce. Now they’re forced to call a timeout until they can figure out what to do."

Eirman says that federal and state government authorities have to tackle the Internet tax issue on two levels: the first on how to tax ISPs and Web portals, and second on how to handle the Amazon.com’s and Dell Computer Corp.’s of the world. "It is a very complex issue," she adds. "Where is an Internet company based? Where is its corporate headquarters? Where does it keep its inventory? If you can’t answer those questions -- and right now the government can’t -- it’s hard to pin down how and where to tax somebody."

When the three-year moratorium is lifted, Eirman thinks the U.S. government is going to have to adopt an "all or none" approach to Internet taxes. "Either we’ll have all 50 states taxing e-commerce at roughly the same rates or there won’t be any taxes at all. If it gets too diverse, with too many states differing on tax rates, you’ll see a host of ISPs and e-commerce companies moving to states with lower or no taxes."

E-commerce providers are taking a harsher stance. "The states have no legal right to charge taxes on e-commerce," warns Robert Olsen, president of Virtual Vineyards, a Palo Alto, Calif.-based winery that sells over the Internet. "Most mail order merchants aren’t taxed, so why should we? Ultimately, I think, it’s going to be an issue of jurisdiction. The states want to tax us and don’t like the fact that they can’t. So I think Congress is taking the correct approach for now."