Are Election Politics Tainting the E-Tax Debate?

In an effort to help elect Republican candidates to office this fall, U.S. House Speaker Dennis Hastert is set to propose an extension on the current e-commerce tax moratorium until 2006.

While it is believed that many Democratic Representatives will oppose the five-year extension, Hastert apparently has the votes he needs. Still, the Speaker is waging what amounts to a public relations campaign to clearly delineate the differences in party philosophy.

“The party that believes in more taxation and regulation is the Democratic Party. The party that believes in less taxation and regulation is the Republican Party,” Hastert will reportedly say in a speech Monday to high-tech leaders in Chicago.

Issue Becomes Political Football

The Illinois Republican will also propose legislation that would allow more foreign workers with high-tech skills to find employment in the United States.

While House Minority Leader Richard Gephardt of Missouri is proposing a three-year extension of the tax moratorium — which is set to expire in September 2001 — it still appears that both sides are using the e-commerce tax issue as a political football to score points with the electorate.

Ironically, this sleight of hand comes only weeks after the Advisory Commission on Electronic Commerce (ACEC) adjourned without being able to come to a consensus on e-tax issues. The government/industry panel failed to get the necessary two-thirds vote to endorse a formal recommendation to Congress, even though 10 of its 18 members supported a five-year moratorium.

Issue Must Be Resolved

Regardless of whether the issue is successfully used to score points as the fall campaign heats up, the current posturing by both sides will not make the fundamental problem go away.

According to a recent report by Forrester Research, as more local governments and multibillion-dollar (US$) retailers join the online taxation debate, the Internet tax moratorium will quickly crumble. Accordingly, it goes on to say that all online sales should and will be taxed just like brick-and-mortar sales.

“The buyer’s physical location at the time he or she takes possession of the goods should determine sales tax liability,” the report states.

Currently, under what is known as “nexus,” e-tailers are only required to collect sales taxes from purchasers in jurisdictions where the e-tailer has a physical presence. For example, eToys collects taxes only on sales to California residents, where it has administrative and warehouse facilities.

Conversely, Borders.com must collect taxes from consumers who live in the 42 states where it has a physical presence.

Supreme Court Reversal

“As shopping channel distinctions disintegrate, tax-collecting brick-and-mortars face an increasing disadvantage relative to their online competition,” the report adds. “Forrester expects these retailers to raise a legal challenge to the nexus standard — by arguing that technology dramatically reduces the cost of remote tax collection. Given this challenge, Forrester expects the Supreme Court to reverse its earlier ‘undue burden’ ruling and subject all retail sales to the tax laws at point of delivery.”

Certainly, Forrester is not alone in coming to this realization. It is hard to imagine that both parties are not well aware that some sort of Internet tax will eventually be levied.

Therefore, I am left to wonder: How will Republican leaders explain to voters after the election that the taxing of e-commerce is necessary if state and local governments are expected to provide such basic services as police and education for their citizens? After all, there is no such thing as something for nothing.

Additionally, I wonder if the party’s strong stance has anything to do with the fact that the majority of 1999 contributions from Microsoft, AOL and their employees reportedly went directly into Republican coffers.