Internet Taxes


With the approaching termination of the internet tax moratorium and the President's release Friday of a sweeping set of proposals including internet taxes, the wailing and gnashing of teeth has begin.

And it's not just the President. Congress is hearing the same message:

Opening statements Tuesday from 17 of the 19 members of the Advisory Commission on Electronic Commerce showed that a majority believe the Internet cannot remain effectively tax-free forever.

Get ready for it folks. Even though the Advisory Committee on Electronic Commerce is stacked in favour of industry, internet taxation is coming. And this is a good thing.

Hysteria and Gnashing of Teeth

It's like the end of the world for some folks. The approach of internet taxation has the anti-tax lobby frothing and foaming at the mouth. And the hysteria is just getting started.

It begins with the oldest dodge in the world - whipping up the rumor mill with improbable scenarios and worst-case predictions. The anti-tax lobby is no exception. Consider the following from Third Age:

Potentially taxable items include e-mail, computer bulletin boards and other value-added services and products. Supporters of such regulations contend billions in state and federal tax revenues will be lost as commerce shifts to the World Wide Web.

But let's get real here, folks. Nobody is proposing that email or bulletin boards be taxed. This dodge is a hoax as old as the hills, and twice as hoary. The infrastructure required to track and tax such transactions would cost more than the potential revenue. And as services included as part of your internet access, there is no 'value-add' to tax.

Other hysteria scenarios point to the many tax regimes at play around the world. TCP/IP architect Vincent Cerf's quote is now making the rounds:

"There are 30,000 taxation authorities in the U.S. alone, [and more around the world]," said Cerf. "Imagine what would happen if all those tried to tax an Amazon.com sale."

Well of course it would be a nightmare were all 30,000 taxation agencies to try to tax the same sale. But of course nobody is proposing such a scenario. Of those 30,000 agencies, only two or three have jurisdiction over any sale. But you can't scare the crowd with such minor numbers.

And in the world of the internet, 30,000 isn't a very large number in any case. Domain name lookups, credit car transactions, online tax returns, electronic banking - all of these forms of e-commerce involve many more entities than the mere 30,000 taxation agencies that would be involved in online taxation.

The Tax Break that Is

But let's look at the online environment as it is. When you go to your local store and buy a CD or a magazine, you generally pay a sales tax on that purchase. You grumble, like we all grumble, and you may even believe - with me - that a sales tax is a regressive and inefficient form of taxation.

But when you log on to CDNow or Amazon to make a purchase, the sales tax magically disappears. You are buying from outside the state, or even from outside the country, and hence don't pay local taxes. Your purchase arrives in the mail a few days later and you congratulate yourself on having beaten the system.

But as the San Jose Mercury New's Dan Gillmor writes, it's an unfair tax dodge:

Internet shoppers have credit cards and computers, and enjoy a generally higher standard of living than lower-income folks who can't shop this way. But Internet shoppers scream, too, when anyone suggests that tax policy works unfairly in their favor -- and they seem utterly unconcerned that the tilt is undermining communities all over America.

Let's face it - the internet provided higher income earners with a way to avoid paying their taxes, thus shifting the burden of supporting local services onto the backs of low wage earners. To say that the high-income earners don't care is an understatement; they actually see tax evasion as their right.

And make no mistake about it - local governments are being hurt. Consider the case of Midvale, Utah, as reported in Upside earlier this year:

When PC seller Micron Electronics Inc., based in Nampa, Idaho, shut down its retail outlet in Midvale in January 1999 to focus more on online sales, Midvale suddenly lost a projected $180,000 in sales tax revenue. That may not sound like much. But as Midvale City Manager Lee King explains: "That's 4 percent of my sales tax revenue that disappeared overnight. You get more than one of these and it becomes serious."

Even such libertarian groups as the Progress and Freedom Foundation (PFF) recognize the need for a rationalization here. As PFF president Jeffrey A. Eisenach told CNN,

"If we are going to tax retailing, we need to tax all retailing alike. I have said repeatedly that sales taxes are suspect in the new digital economy, no matter who they are levied by. But as long as we have sales taxes, it's pretty hard to - for example - require Gateway to pay taxes on its computer sales just because it has opened a few sales offices - while Dell doesn't."

It's a telling argument, and so it's not surprising to see the big boys lining up on the other side. The PR-spin was launched this week with a study, credited to Ernst and Young, which may be found, among other sources, in today's Industry Standard and Chicago Tribune. The point of the study was to argue that the tax loss caused by e-commerce is minimal - not $20 billion as some sources claim, but rather, in the order of $170 million.

Not mentioned in the news articles, and buried at the bottom of Ernst and Young's press release, is the information that the study was funded by the E-Commerce Coalition. No link, but if you dig into the study itself (PDF link) you will find that ECC is comprised of America OnLine, Andersen Consulting, Cisco Systems, Intuit, Microsoft, Time-Warner and WalMart. The study, like Goolsbee's (mentioned below), depends on projections, estimates, and a fine distinction between liability and collections.

The study is flim-flammery at its very best. Most of the projected tax costs are eliminated because the services are held to be non-taxable, but because they include as "non-taxable" any online purchase which would replace a catalogue purchase, their definition of "non-taxable" begs the question the study is supposed to resolve. Moreover, they argue that because the tax is owed but not collected, there isn't really a loss of tax revenue; rather, there is just an implementation problem.

But this whole line of argument simply doesn't pass the credibility acid-test: if the amount of money lost is so minimal, why is there such a concerted industry-wide effort to prevent it from being recovered?

You Have Nothing to Lose But Your ChainsÂ…

The big propaganda pitch, of course, it that an internet tax is an unreasonable restraint upon electronic commerce. As Hands Off The Internet writes, "The bottom line is that Internet commerce must be free to develop, unfettered by discriminatory and burdensome taxation."

Most certainly "discriminatory" taxation is to be avoided - though in a patchwork world of different tax regimes it is hard to imagine any system that would not be labeled "discriminatory". As for "burdensome" - well, that's always the plaint, isn't it? Far be it for industry to pay for the infrastructure which makes their businesses possible at all.

But the pundits are lining up their research, and a few nightmare scenarios are already on the table:

Austan Goolsbee, an economics professor at the University of Chicago, said most research indicates online sales next year could reach $200 billion to $1 trillion. His own study of 25,000 online buyers concluded that imposing a sales tax on remote commerce would cut spending by 30 percent. "Internet sales are highly sensitive to local taxation," Goolsbee said.

Goolsbee's study (PDF link) - focuses on minimizing the loss of revenue incurred by not taxing internet commerce. He argues that the $20 billion loss in revenue cited by many source is in reality no more than about $157 million to $208 million. This reasoning is highly suspect, based more on assumption (his word, not mine) than on economic data.

As for the 30 percent drop in sales, Goolsbee relies on a survey conducted by Forrester Research using a "proprietary" survey methodology. You can read this research yourself - provided you're willing to pay for it.

But one proprietary study does not constitute a trend, and the 30 percent figure seems too fantastic to be real. Until we have available some publicly viewable data, corroborated through rigorous scrutiny, there is no reason to believe such a figure.

Quite the contrary. Internet taxes already exist. Subscribers in Canada pay seven percent federal tax, plus additional provincial tax, on their internet access. Yet internet use in Canada is approaching fifty percent of the population, and the nation's presence on the net is out of proportion to its size.

And companies like Charles Schwab - which now does up to $4 billion in trades a day online, are already taxed. Yet even though paying taxes, companies like Schwab have managed to gain market position because of the other advantages on online commerce.

You can lead this duck to water but you can't make it fly.

No New Taxes - But a Few Old Ones

The upshot is, there will be internet taxes. Of much more interest is their nature and their scope. The recently released paper by Bill Clinton and Al Gore, A Framework For Global Electronic Commerce, is illustrative.

Clinton and Gore first recommend that the World Trade Organization declare the internet to be a tariff-free zone "before nations impose tariffs and before vested interests form to protect those tariffs."

They then recommend that

The taxation of commerce conducted over the Internet should be consistent with the established principles of international taxation, should avoid inconsistent national tax jurisdictions and double taxation, and should be simple to administer and easy to understand.

And finally, they propose that internet taxes should not hinder commerce, that they should be simple to administer, and that they should accommodate tax systems in use today.

Clinton and Gore's recommendation that the internet be a free-trade zone is a remarkable concession to the anti-tax lobby, all the more so given that international commerce is plagued with a myriad of tariffs, countervails, duties, and other obstructions.

One wonders what the response of American business would be were nations such as China or Singapore to embrace a tariff-free internet to flood the American market with cheap cars, stereos or cigarettes.

In order to meet their stated goals of simplicity, fairness and consistency, online taxation is going to have to be at the same rates, for the same goods, and in the same ways as offline taxation. For otherwise there exists a tax system which is de facto discriminatory.

Mechanisms

The big problem with an internet sales tax is the issue of personal privacy. In order to tax goods at the point of purchase, some mechanism must be employed forcing internet users to divulge their purchases.

At the local news stand or grocery store, that's no problem. You present your copy of Wired to the clerk, he scans it, and the register automatically adds five percent. You remain anonymous. And unless you record your purchase with an Air Miles card or some similar data-collection mechanism, your purchase remains anonymous as well.

Online, however, there is no clerk to track the purchase and add the tax. And for privacy reasons, it doesn't make sense to monitor online purchases at either the browser or ISP level. Thus we see a push toward pressuring direct sellers to release sales data and pay taxes to the appropriate jurisdiction.

There is no reason why this wouldn't work; it need not be complicated, and it need not violate any person's privacy. Several companies - such as Vertex or CyberSource, which recently launched a new payment processing system for internet merchants.

The Free Ride is Over

If you oppose internet taxes because you are opposed to taxes in general I sympathize with your desire for a free ride. But as an argument agains internet taxation it won't wash, because it is based on a premise more unlikely than the conclusion.

If you oppose internet taxes because you oppose sales taxes in particular I sympathize with your desire for a fairer system of taxation, but so long as there are sales taxes in general there should be online sales taxes as well.

Most likely, you oppose internet taxes because you have this belief that life online should be unfettered and free. But the cost of that would be unacceptably high. As online commerce replaces traditional sales, the concept of a tax free internet approaches the concept of a tax free society. Nice theory, disastrous in practice.

It's time for the well-heeled online buyer to start paying his share. The free ride - finally! - is over.

Random References

Posted at 6:01 p.m. PDT Tuesday, May 4, 1999
http://www.sjmercury.com/svtech/columns/gillmor/docs/dg050299.htm
Double standards on Net tax
BY DAN GILLMOR
Mercury News Technology Columnist

Third Age
http://www.thirdage.com/news/archive/990628-01.html?hnav
Speak Out: Taxing the Net
ARCHIVE | JUNE 28, 1999

Sales Tax And The Internet: What's Next With Nexus
Above the Crowd
June 23, 1997
by J. William Gurley
http://www.upside.com/texis/mvm/story?id=34712c1a89
Upside

http://www.upside.com/texis/mvm/story?id=36e8186f0
Tax the Net!
March 23, 1999
Norm Alster

http://www.upside.com/texis/mvm/story?id=3521277c0
Local Communities Lose Out
Open Letter
April 06, 1998
David Coursey

http://www.upside.com/texis/mvm/richard_brandt?id=369f8b1b0
Tax the World!
Inside Upside
January 14, 1999

http://www.upside.com/texis/mvm/story?id=3690ffee0
Net Taxation Is a Global Issue
On the Soapbox
January 06, 1999
by Ron Erickson

http://cnnfn.com/news/technology/newsbytes/132914.html
New Group Bashes Gov't Internet Interference
July 02, 1999: 5:30 p.m. ET
CNN

Hands Off the Internet - Statement of Principles
http://www.HandsOffTheInternet.org/principles.asp

http://cnnfn.com/news/technology/newsbytes/132687.html
Net Tax Stories Tax Armey's Patience
June 29, 1999: 5:09 p.m. ET
CNN

Congress
Internet Tax Freedom Act
ftp://ftp.loc.gov/pub/thomas/c105/s442.is.txt

Clinton, William J, and Gore, Albert
http://www.iitf.nist.gov/eleccomm/ecomm.htm
A Framework For Global Electronic Commerce

http://www.news.com/SpecialFeatures/0,5,12081,00.html
Keeping the Net tax-free
By Courtney Macavinta
Staff Writer, CNET News.com
July 1, 1997, 3:55 p.m. PT

A Taxing Conundrum
http://abcnews.go.com/sections/us/DailyNews/internettax990621.html
By Curt Anderson
The Associated Press
W A S H I N G T O N, June 21

Vertex. Home Page.
http://www.vertex.com/

http://www.usatoday.com/news/comment/ncjf28.htm
06/29/99- Updated 04:20 PM ET
Don't tax the Internet!
By James Freeman
USA Today

http://enquirer.com/editions/1999/07/05/fin_hole_in_net_auction.html
Monday, July 05, 1999
Hole in the Net: auction site taxes
Honor system for sellers on IRS reporting
BY ALBERT B. CRENSHAW
Washington Post

http://www.wichitaeagle.com/technology/docs/internet0623_txt.htm
Updated WEDNESDAY June 23, 1999
Panel: Internet taxes coming
Curt Anderson
Associated Press

http://www.cybersource.com/
CyberSource corp. Home Page.

http://www.internetnews.com/intl-news/article/0,1087,6_155351,00.html
CyberSource Launches International Payments Processing
July 2, 1999
By the InternetNews.com Staff

http://www.thestandard.net/metrics/display/0,1283,920,00.html
June 28, 1999
Net Taxes Have Little Impact on Local Revenue
By Maryann Jones Thompson
Industry Standard

http://chicagotribune.com/version1/article/0,1575,ART-30809,00.html
Fears about lost sales tax on Net overblown
By Susan Chandler
Chicago Tribune Staff Writer
June 25, 1999

http://www.dallasnews.com:80/technology/0629tech2hoax.htm
E-mail tax hoax makes rounds again
06/29/99
By Melinda Rice / Special Contributor to The Dallas Morning News

http://www.ey.com/ecommerce/sky.asp
The Sky Is Not Falling: Why State and Local Revenues Were Not Significantly Impacted by the Internet in 1998
Ernst and Young

American Petroleum Institute
Home Page
http://www.api.org

http://www.api.org/ecit/enews/19980401.html
API eNews
Monthly updates on electronic business and electronic commerce
April, 1998

http://www.house.gov/cox/nettax/
Internet Tax Freedom Act - Home Page

http://www.wired.com/news/news/politics/story/18203.html
Counties Demand Net Tax
by Declan McCullagh
3:00 a.m. 2.Mar.99.PST
Wired News

http://www.wired.com/news/print_version/politics/story/20323.html?wnpg=all
Net Tax Panel Convenes, at Last
by Declan McCullagh
3:00 a.m. 21.Jun.99.PDT
Wired News

Advisory Committee on Electronic Commerce
http://www.ecommercecommission.org/

http://www.wired.com/news/print_version/politics/story/20323.html?wnpg=all
Net Tax Panel Convenes, at Last
by Declan McCullagh
3:00 a.m. 21.Jun.99.PDT
Wired News


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