Copyright 2000 The Washington Post
The Washington
Post
March 5, 2000, Sunday, Final Edition
SECTION: FINANCIAL; Pg. H02; CASH FLOW
LENGTH: 1242 words
HEADLINE:
Online Taxes: Who Would Collect?
BYLINE: Albert B.
Crenshaw
BODY:
The debate currently
raging over "taxation of the Internet" has been marked by more heat than
light--at least at the sound-bite level where much of our public policy
discussion takes place.
Congress has enacted the Internet Tax Freedom
Act, which forbids new Internet taxes until October 2001.
The law was
intended to block new taxes on such things as
Internet access. But much of the debate is over old
taxes--the sales and use taxes that many state
and local governments depend on to finance the services their citizens want.
Much of the debate is technical, even arcane, but it is one you should
pay attention to, and not only if you are interested in buying things over the
Internet. The ultimate resolution of these issues is likely to affect the amount
and nature of the taxes you pay, and how your state and local governments
operate.
Two taxes are involved, though most people rarely distinguish
between them, nor do they need to. Sales taxes are levied on a transaction and
are levied at the point it takes place. Use taxes are imposed on the consumers'
right to use something they have purchased, and they are levied--but generally
not collected--when the consumer brings the acquisition into the taxing
jurisdiction. Use taxes backstop sales taxes and are aimed at people who buy
things out of state.
These taxes are not levied on the Internet or on
online merchants. They are not levied on traditional merchants either. They are
levied on you, the purchaser. The role of the merchant is tax collector, not
taxpayer, and the issue in much of the debate is whether online vendors should
be required to collect sales and use taxes on behalf of the jurisdiction in
which the purchaser lives.
This debate is a rerun of one involving
mail-order merchants that sell their goods through catalogues. Twice in the past
40 years, the issue of whether to compel mail-order merchants to collect sales
and use taxes has reached the Supreme Court, and the rule today is that they can
be required to collect if their contact with the state exceeds a certain
threshold.
That threshold, which lawyers call "nexus," is not perfectly
clear, but having stores in a state reaches it. Generally, other obvious
presences, such as distribution centers and service operations, will also
establish nexus. Merely mailing catalogues and shipping in merchandise ordered
from them doesn't establish nexus.
Online vendors, like catalogue
merchants before them, say the burden of collecting sales taxes from 45 states
that impose them, along with local jurisdictions, is too difficult.
And
indeed, there are problems. States levy sales and use taxes on different things.
Virginia, for example, taxes food sold in grocery stores, but the District does
not.
Also, states have different rates-- and some have different rates
for different types of goods. The problem for states, though, is that if vendors
do not collect the tax, most of it doesn't get paid.
There are some ways
that states can collect. If you go out of state and buy a car, your state can
collect its tax when you register it. Or if you go abroad and buy things and
make a customs declaration when you come back, some states match those
declarations to addresses and send bills.
New York, probably the most
aggressive state at both imposing and pursuing taxes, attempts to track down
buyers of expensive luxury items, especially New Yorkers who buy them in-state
but have them shipped to out-of-state addresses.
But as a practical
matter, states have little way of collecting the small amounts due on the myriad
items subject to the use tax, which is where most of the money is.
If
you go to Delaware, which has no sales tax, to buy a winter coat, Virginia has a
tough time catching you even though you're legally obligated to pay the use tax.
The same is true of catalogue sales, and now online sales.
The
result is substantial revenue loss to the states and a big advantage to online
vendors and catalogue sellers that lack nexus. Shifting the tax burden to the
customer--who knows full well he isn't going to pay--amounts to an automatic and
in some cases very substantial discount compared with what the merchant at the
mall must charge for the same item.
Online and mail-order merchants love
this advantage, but it is very costly for states and is growing more so. One
study found that states lost $ 525 million in sales tax last
year because of the Internet, and another projects that states'
inability to collect use tax on remote sales
will cost them $ 20 billion annually by 2003.
Some experts see the nexus
issue as growing even worse in cyberspace.
"With mail-order, the issue
was clearly can an out-of-state company with no physical presence be subjected
to the responsibility of collecting customers' state taxes. What we face with
e-commerce is many situations where the buyer and seller will not know each
other's names, much less what state they are located in," said Nicholas Nesi of
the accounting firm BDO Seidman in New York.
Then what about digitized
products? Suppose a businessman from New York is visiting Chicago and decides to
download music off the Internet from a company in Connecticut. Whose tax would
be imposed? And indeed, what tax? Is such a deal a sale? Maybe it should be a
royalty or a pure intangible, which might be taxed differently.
Even
with an ideal way of characterizing digital products, "who is going to ensure
that all 45 states that have sales taxes are going to impose a uniform
definition?" Nesi asked.
Nexus is another problem. If a distribution
center establishes nexus, would the presence of a computer server belonging to
the vendor's Internet provider establish nexus?
Some state officials
believe that with improved software and some standardization of how items are
classified for tax purposes, most of the problems can be worked out.
"No
way are we going to push for an expansion of nexus. The other side is pushing
for a narrowing," said Ray Scheppach, executive director of the National
Governors' Association.
If that strategy fails, governments and voters
will face tough choices.
Scheppach said that in states with sales and
use taxes, they provide about 40 percent of the revenue and those taxes are
"very popular relative to property and income taxes."
"If they lose the
sales tax, I don't think they are going to be able to get the same revenues from
an income tax," he said.
Federal sales-tax collection has been proposed
but is not appealing to states because it raises thorny sovereignty issues, plus
annual squabbling over shares, he said.
And waiting in the wings are
other tax issues. Local taxes on telephone and cable television services are an
important revenue source in some areas. As those migrate to the Internet, or
become part of bundled packages, what replaces those revenues? It's nice to
think the Net has brought a free lunch, but it's not that simple.
If the
sales and use tax fades as a source of revenue, voters will have to choose
between raising other taxes and cutting services.
Certainly there are
plenty of people who would not mind seeing, say, income taxes rise, and others
who would welcome any governmental shrinkage. But as you watch the debate and
look at the various Internet tax arguments, try to understand the longer-range
effects. It's not a matter of saying "Don't tax the Internet" and thinking
nothing else will happen.
LOAD-DATE: March 05,
2000 
