Momentum Builds for Internet Tax

Despite a five-year extension of the U.S. moratorium on Internet taxation, support for taxing online purchases appears to be gaining strength among legislators and consumers.

Individual U.S. states in particular are keeping a watchful eye on steadily increasing Internet sales, out of concern over the amount of sales tax revenue they are losing as more and more businesses move online. According to venerable Wall Street ratings agency Standard & Poor’s, however, the highly anticipated explosion of online shopping is not a direct threat to state and government tax coffers.

Taxes Still Hot

Even though the conventional wisdom in Washington is that the e-tax issue was put to rest with the moratorium, concerned parties in various quarters are still pursuing it.

Frank Shafroth, head of state and federal relations for the National Governor’s Association (NGA) said the possibility of widespread e-commerce growth will affect offline merchants, as well as income tax and real estate assessment revenues. The NGA would like to streamline the sales tax process by standardizing rates throughout the United States, making it easier to collect taxes across borders from the Internet and other channels.

Building Support

Meanwhile, support is growing for legislative proposals designed to assist states in their efforts to collect taxes on Internet purchases.

“The sales tax is the backbone of most state budgets and the foundation for the funding of education, police, fire and transportation needs in our communities,” U.S. Rep. Spencer Bachus (R-Alabama) said.

According to Rep. Bachus, if some form of Internet taxation is not enacted, “Internet retailers will continue to enjoy a tax haven, while brick-and-mortar retailers will pay higher and higher taxes to make up for the revenues lost.”

Bachus is sponsoring a bill that would tax online purchases, a move that has gained him considerable respect among fellow legislators. Senator Byron Dorgan (D-North Dakota) has proposed a similar measure in the U.S. Senate.

States Claim Revenue Loss

State and local governments are drawing increased attention to their claim that the potential revenue losses caused by a tax-free Internet could be fiscally debilitating.

In Florida, for example, according to Cambridge, Massachusetts-based Forrester Research, $30.3 million (US$) in sales tax revenue was lost in 1999 due to the lack of online taxation. Forrest projects that loss will be $1.4 billion by 2003.

“As more and more people buy online, there will be a loss in state revenue because people just aren’t paying the sales tax,” said Kurt Wenner, a senior analyst with Florida TaxWatch, a watchdog group. “Traditional taxation models just don’t apply to the Internet, because the Internet doesn’t pay attention to state and jurisdictional boundaries.”

Florida is particularly concerned because 72 percent of its revenue comes from sales taxes.

Consumer Reaction Mixed

As legislators debate the issue, the message from consumers is unclear. A study last month from the International Council of Shopping Centers reveals 49 percent of those surveyed were not even aware there is a debate over Internet taxation.

Sixty-two percent of the respondents said they agreed with the argument that a tax-free Internet discriminated against people with less money, who were often the people who do not have Internet access. Asked if they believed it is unfair to let consumers avoid taxes when shopping online, 65 percent said yes.