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A Taxing Debate About E-Commerce
Technology has had a profound influence on society, and now it is threatening one of the two certainties in life — taxes, at least the state and local variety.
Both online-only retailers and some traditional retailers who have set up dot-com subsidiaries have been avoiding the complicated mess that embodies the collection of myriad and conflicting local and state sales and use taxes. But as shoppers move online, states and local jurisdictions are watching millions in potential sales and use tax revenue evaporate into the ethernet.
Look Ma, No Money
Currently, sales and use taxes imposed by state and local officials cannot be collected from remote sellers, and with e-commerce projected to be $140 billion in 2003 for business-to-consumer sales and $1.3 trillion in business-to-business e-sales, state legislators are scrambling to simplify their tax codes so they can collect taxes on Internet transactions.
Legislators fear that the decline in revenue will force them to increase local property-tax rates to cover the sales and use-tax revenue lost to online sales. They also argue that failure to tax online sales will place an onerous burden on small retailers, in essence punishing them for being local entrepreneurs. Through the Streamlined Sales Tax Project (SSTP), legislators are crafting a joint proposal to simplify their tax codes to make it easier to collect taxes on Internet sales.
Wall Street already has expressed concern that the decline in sales tax revenue will harm cities' ability to repay long-term debt, possibly causing bond-rating agencies to downgrade the ratings of municipalities, said David Goldwater, an assemblyman from Nevada.
Goldwater has suggested that a bond-rating agency evaluate the current sales-tax simplification project before it goes any further. "I think the bias would be good because we're doing something as opposed to doing nothing," he said, but having objective third-party input would be invaluable.
If state officials are not successful in the next few legislative sessions in simplifying their tax codes, they will have an even bigger job of sorting out "what our successor tax structure will look like," said Illinois state Sen. Steve Rauschenberger, R. Rauschenberger is also a co-chairman of the a National Conference of State Legislatures (NCSL) task force on state and local taxation of telecommunications and electronic commerce.
The Court
In 1992, the Supreme Court ruled that state and local tax systems are too complicated for a business to calculate for every tax jurisdiction, so it stated that a business must have a physical presence, or nexus, in a state before it is required to pay sales and use taxes there. "There was never a question that states have the right" to collect the taxes, but the high court deemed the collection process too burdensome, Rauschenberger said.
Technology makes it easier to calculate and remit those taxes, but it is still problematic because tax rates vary depending on the product, and localities often change rates several times a year without much notification. The SSTP has tried to address this concern by crafting model legislation that would require states to set one local tax rate and one state rate, unify definitions of products and limit state and local governments' ability to change tax rules.
The current draft of the legislation also would phase out the caps on local and state sales taxes by 2005 and phase out multiple tax rates within a state to one rate by the end of 2005. To participate in the project, state legislatures must agree to all of the provisions within the model legislation and the model interstate agreement, the part of the bill that gives the administrative go-ahead to enact the bill.
If Congress does not give states the right to tax online sales after attempts to simplify their systems, eventually the case may go back to the Supreme Court. States then will need to prove they really simplified the tax structure "instead of covering up the complexity with technology," said Neal Osten, director of NCSL's commerce and communications commission.
Osten said a Supreme Court challenge is several years away, but he does anticipate a few states filing legal challenges to the practice of firms such as Wal-Mart establishing dot-com subsidiaries to avoid paying taxes in states where they have a presence.
Pre-empting Congress
The impending expiration of a moratorium that bars the taxing of Internet access complicates the issue. The moratorium expires in October 2001, and the issue of taxing e-commerce has become intertwined in that debate. State legislators are worried that when Congress considers this issue, it will mandate some type of national system on taxing e-commerce, and they want to show the federal government that states are addressing the issue.
The SSTP draft legislation, crafted with the help of state officials and the business community, may be introduced in 2001, when all 50 state legislatures will meet. Members of SSTP are expected to further refine the bills based on comments at a public meeting that the NCSL hosted in Washington in December. In late January, the NCSL is expected to vote on whether to recommend that state legislators introduce the draft legislation in their legislatures.
The word "taxes" is emotionally charged and no politician wants to be accused of imposing new taxes or adding a surcharge to the Internet and e-commerce. Observers of the debate can expect to see a parade of witnesses in congressional hearings articulating fears that any new tax would hamper the growth of the Internet, just as they did last session.
"It needs to be very clear that we are not advocating new taxes" but rather are trying to find ways to collect taxes that already are owed, said Tennessee Rep. Matt Kisber, D, co-chairman of the NCSL task force on e-commerce.
Try Telling That to My County Commissioner
State legislators face an uphill battle back home as they try to persuade their colleagues and local officials that they should revamp their tax codes and relinquish power. "This is the single-most difficult challenge I've seen," said Frank Shafroth, director of state and federal relations at the National Governors Association. "It took [President Ronald] Reagan three years to deal with federal taxes, and this encompasses 7,500 jurisdictions."
But Rauschenberger said the battle is one that should be fought. "Some of these things are no-brainers, and we need to face up to them quickly," he said.
Some members on the NCSL task force at last week's hearing asked what impact the legislation could have on local tax initiatives designed to lure businesses, particularly high-tech firms, to the area. But Goldwater said the SSTP bill should not interfere with those plans. Cities could offer a tax rebate, and businesses should not be dissuaded by getting the money at the end of the year instead of up front.
Shafroth noted that despite the tough challenges ahead, state legislators need to answer those types of questions and convince other officials of the need to simplify the tax code. State officials are faced with three choices: changing the tax system themselves, letting the federal government do it or allowing "the erosion of the current system to continue until it implodes."
 | - by Teri Rucker |
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