California Inches Toward Internet Tax

The California Assembly narrowly approved an Internet tax measure Tuesday that could bring millions of dollars (US$) to what is arguably the leading high-tech state in the U.S. The bill now moves to the state Senate.

The goal of the bill is to provide similar treatment for retailers with stores in California who must pay the tax, and Internet companies that are related to retailers but do not pay sales taxes under current law, said the bill’s author, Carole Migden (D-San Francisco).

Only Internet companies with a physical presence in the state would be affected by the proposed legislation, including such major online book retailers as Borders and Barnes & Noble. Both companies have brick-and-mortar book stores in the state that charge sales taxes, while their Internet sites do not.

Retailers that take orders in California only via the phone or the Internet are not considered to have a presence in the state and therefore do not have to pay sales taxes.

Lost Tax Revenue

State and local governments across the United States are grappling with major online retailers and others over the Internet sales tax issue. Proponents of a tax ban on sales over the Internet say that taxes would thwart the incredible growth of e-commerce and hurt the global economy, while opponents say a tax ban will only serve to deepen the so-called digital divide between the haves and have-nots.

What’s more, many traditional retailers believe that their online counterparts are being handed a competitive advantage because they do not charge sales tax.

“Proposals to make the Internet a sales tax free zone are attractive, but have potential devastating economic, tax and social consequences,” the E-Fairness Coalition, a group made up mainly of traditional retailers and state governors told a Congressional panel. “America can’t survive if we have discriminatory taxes.”

The issue has significant economic implications for state coffers. For example, Forrester Research estimated in a recent study that states lost about $500 million in tax dollars to online retail sales in 1999. The study also estimated that seven percent of all purchases will be made online by 2004.

Though state budgets are overflowing now because of the strong economy — California, for example, is enjoying a $12 million surplus — states are worried that they would suffer if the economy takes a downturn.

Political Football

In 1998, the U.S. Congress passed the Internet Tax Freedom Act, which banned all new Internet taxes through October of 2001. A congressional advisory committee, due to make a recommendation in April, was not able to reach a unanimous agreement before the deadline.

Thereafter, in early May, Congress approved a five-year extension on the controversial tax moratorium. That bill passed overwhelmingly, despite the fact it was opposed by the White House and the majority of U.S. state governors.

U.S. Senator John McCain (R-Arizona) is the author of a bill that would permanently extend the moratorium on Internet taxes and ban the future collection of online sales taxes. House Republicans have presented their “eContract 2000,” which advocates a total ban on Internet taxes, in addition to calling for an increased number of work visas for skilled immigrants.

“We assert that freedom is the answer, not government intervention,” the e-contract states.

As for the California legislation, no Republicans voted for it and nine Democrats abstained. The measure passed with the minimum 41 votes.