Forrester: Online Sales Should and Will Be Taxed

According to a new report by Forrester Research, Inc., 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 says. 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.

Forrester predicts that as more local governments and multibillion-dollar (US$) retailers join the online taxation debate, the Internet tax moratorium will quickly crumble.

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.”

Still, Forrester concedes that the Internet tax issue will reach a fever pitch later this year as the presidential race heats up.

In fact, during a recent Republican presidential debate, Arizona Senator John McCain challenged Texas Governor George W. Bush to join him in a pledge to permanently ban Internet taxation.

Bush declined the offer, saying instead that a three-to-five-year extension of the current tax moratorium would be a more prudent course.

Strong Stance

Some industry observers say that McCain, who won the New Hampshire primary, helped his candidacy by signing a no-taxing the Internet pledge at a Chamber of Commerce breakfast in the state. During the ceremony, the former prisoner of war left no doubt about how he wants the issue resolved.

“A permanent ban on Internet taxes,” McCain declared. “Not a moratorium, but a permanent ban. [No Internet taxes] now, not soon, not ever.”

Will Internet Tax Stifle the New Economy?

McCain and others who share his hard line contend that Internet taxes would seriously stifle the booming new economy.

One recent study by the Information Technology Association of America (ITAA) came to the same conclusion. The pro-business group found that about one-third of American adults would be less inclined to buy products on the Internet if those purchases were taxed.

The data was released in conjunction with the Advisory Commission on Electronic Commerce’s September meeting. “Voters want to see growth in the Internet and e-commerce, not e-taxes,” the ITAA said.

Conversely, Forrester argues that retail taxes will not keep consumers from shopping online.

“Consumers shop online today for many reasons, including convenience, selection, and added services — but avoiding taxes is not at the top of the list,” Forrester concludes. “Sales taxes should be treated equally in any of those channels to prevent confusion, complexity and inequity.”

Another big reason that Forrester believes taxation of the Internet to be inevitable is the fact that state governments are not about to walk away from such a potential tax windfall.

“By 2004, Forrester projects that 7 percent of U.S. retail sales — $184 billion — will take place over the Net. This means that $8 billion of tax revenue is at stake. State and local governments won’t leave that money on the table for retailers and consumers to pick up.”