Internet Taxation Issues Remain Unanswered

The hoopla generated by the Internet Tax Freedom Act seems to have dissipated somewhat. The hope had been that the Advisory Commission on Electronic Commerce (representing government and industry) would reach a broad consensus on the taxation of Internet activity and provide concrete recommendations to Congress. This did not happen.

The Commission did not have the two-thirds vote required for a formal recommendation. It could, therefore, only agree on (1) extending the current moratorium on Internet access charges, (2) requiring clarification of what will create seller nexus, (3) simplifying sales tax and (4) eliminating the 3% Federal excise tax on telecommunications.

The (now three-year old) question of how to handle tax on sales over the Internet remains unanswered. Retailers with Internet sites only (clicks) are charging sales tax only when an item is shipped to their home state or a state in which they have a warehouse or other property. Retailers with both Internet and actual stores ("bricks and clicks" or "clicks and mortar") are busy creating separate companies for their Internet sales activities and establishing firewalls between the two types of stores. This allows companies to charge sales tax only on their Internet sales in the state in which the Internet company is located (or a state in which the Internet company has a warehouse or other property).

The backlash against these strategies comes from two sources. The first is the "Main Street" community--those retailers who have small stores in one state and who, because they must charge sales tax on all their sales, are less competitive with the large Internet companies selling the same merchandise.

In response to strong lobbying by its constituents, in September, the California legislature passed a bill that would require an out-of-state Internet retailer to collect sales tax if it has a substantial interest in a retailer with sales locations in California (or vice versa), and the related companies sell the same or a substantially similar product line. Although the governor vetoed the bill, the sentiment still exists.

The second source of backlash is from states that fear the growing volume of Internet sales will lead to a serious diminution of their sales tax revenue. Thirty-eight states are participating in a "streamlined sales tax project," a response to Internet retailers' concerns that there are too many sales taxes (e.g., state, county, city, transit districts) with too many variations and rates.

The project hopes to reach agreement on some basic definitions in the tax base; finalize work on four technology models; determine uniform rules for sourcing, rounding and bad debts; modernize exemption administration; and complete work on numerous other simplification features.

In the meantime, the Internet consumer is benefiting--finding more choices for less money.

From Joe Huddleston, J.D., Nash-ville, TN