What You Don’t Know About Net Taxes

Did you know that the current U.S. moratorium on Internet taxation does not ban taxes on goods sold via the Internet?

If you did, count yourself among the lucky group that has not been confused or misled by the fragmented Net tax debate.

The Internet Tax Freedom Act, enacted by the U.S. Congress in October 1998, prevents three types of taxes: 1) taxes on Internet access, 2) duplicate taxes on transactions that two or more states could tax, and 3) discriminatory taxes that would tax specific products online that are not taxed offline.

The Act specifically does not prohibit states from collecting sales tax on online purchases. Nonetheless, participants in the Internet sales tax debate have often blurred the distinctions — sometimes out of ignorance, but sometimes not.

“Opponents and proponents tend to link the two together,” Larry Good, senior vice president of the Electronic Commerce Association, told the E-Commerce Times. “Proponents of the moratorium like to call it a ban on any taxes on e-commerce. Opponents like to say that there’s no reason there should be any favorable tax treatment for online merchants.”

Some Issues See Little Debate

Seen within the prism of Washington D.C.’s infamous partisan politics, the Internet Tax Freedom Act has received wide support. In May, the House of Representatives voted 352-75 to extend the moratorium for five years beyond its 2001 expiration.

The main debate on the Act does not concern whether the moratorium should be extended, but for how long. President Bill Clinton has favored a shorter extension. The Senate postponed introducing a version of the bill in order to focus on other election-year issues, but an extension of some length is expected to pass before the Act expires next year.

Thus, on access, duplicate and discriminatory taxes, there has been a relative consensus. In contrast, however, fierce disagreements have arisen over whether online goods should be taxed — which comes as no surprise, given how much is at stake. Forrester Research estimated in February that U.S. state and local governments passed up $525 million (US$) in potential 1999 tax revenues from Internet sales.

As a result, both sides of the online sales tax debate have drafted the moratorium into service for their positions.

Looking for a Bargaining Chip

Though the Act ensures that items which are tax-free offline will not be taxed online, nobody has found a way to assure the converse — that taxable offline items will be taxed online.

For example, if you live in Oklahoma, a book purchased from an offline Tulsa bookstore will be subject to sales tax, plain and simple. However, the same book, when purchased via the Internet, could meet any kind of sales tax fate, depending not only on whether the online retailer has a physical presence in Oklahoma, but also on the difficult logistics of interstate tax collection.

Because brick-and-mortar retailers feel that they are being treated unfairly in a such a scenario, they are wary of offering their blessing to anything that minimizes online taxation — if only to retain a bargaining chip.

Consequently, the existing Internet tax moratorium, which on its face has nothing to do with sales tax, is nonetheless being targeted.

“There is some opposition to extending the ban without having something else that makes the issue better for retailers than the states,” Good said.

Information Juggling

Sometimes, a confluence of events — or the grinding gears of democracy — confuses the different tax issues.

Currently, some brick-and-click retailers in California voluntarily collect tax on online sales, while others do not. On September 25th, California Governor Gray Davis vetoed a bill that would have required all online businesses with a physical presence in the state to collect sales tax.

Simultaneously, Davis signed a bill extending California’s moratorium on Internet access taxes for three years. Furthermore, Davis approved the second bill with the explicit knowledge that it was unnecessary — that the Net access tax would have become law only if the Internet sales tax bill had.

An observer could easily have walked away with the impression that a moratorium on sales tax had been implemented or extended, when from a legal standpoint, no action on the sales tax issue had been taken.

Framing the Debate

Good said that the Electronic Commerce Association has been among those working to relieve offline retailers of “the burden of explaining to people” how the moratorium affects some taxes but not others.

Ideally, as the issue of Internet taxation draws more passionate attention, more people will be able to juggle their facts successfully.

“I think there’s a greater understanding today than there was a year ago,” Aaron Lukas, an analyst with the Cato Institute’s Center for Trade Policy Studies, told the E-Commerce Times. “People understand the distinction.”

With that distinction understood, let the true debate begin.