Congress next year will likely consider what many believe is one of the nation’s most pressings business issues: Should Internet commerce be taxed? And if the answer is ‘yes,’ another question emerges immediately: How can a tax system work fairly?
Lawmakers have already begun to tackle these questions. In 1998 they passed the Internet Tax Freedom Act, which created a three-year moratorium on new Internet taxation. As part of the act, Congress established a 19-member commission to study the issue of electronic commerce taxation. It asked the commission to report back in April of 2000 with a recommendation on how lawmakers should proceed. The commission, which includes people like Virginia Gov. James Gilmore, Washington Gov. Gary Locke, America Online President and Chief Executive Officer Robert Pittman, and Charles Schwab President David Pottruck, will hold its next meeting in San Francisco Dec. 14 and 15.
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By next March, the commission is expected to vote on the report that it will submit to Congress, said Heather Rosenker, executive director of the commission.
Just what it will recommend no one knows. Numerous questions will have to be answered before then.
For example, observers say that one of the biggest problems now is that there is no consensus among the states as to how electronic commerce should be taxed.
Right now, they impose taxes in three main ways. Some consider the product that Internet Service Providers offer, Internet access, to be a product which is subject to a sales tax. Conversely, other states consider it a service – which is not subject to taxes.
Taxes may also be issued on the sale of goods that takes place over the Internet, particularly in the case in which the seller has a physical presence – often referred to as a nexus – in that state.
Third, taxes may be imposed on software that is purchased over the Internet. For example, some governments consider the software that is downloaded from the Internet to be a tangible item, which should be subject to tax. Others consider it an intangible item, and intangible items, like services, are often not taxed.
According to Mark Nebergall, a spokesman for the Internet Tax Fairness Coalition, a business group located in Washington, D.C., most states are taxing the various forms of electronic commerce by expanding their readings of their old laws to include electronic commerce.
”What you have is the taxing authorities interpreting their old laws in new ways,” Nebergall said.
Debate over the question of whether electronic commerce should be taxed at all, however, is hotly contested. While a number of lawmakers have made proposals for how it should be taxed, a number of groups, citing statistics, argue that no tax should be assessed.
For example, a group called Fight Internet Taxes!, a campaign by The Heritage Foundation, argues the Internet stimulates purchases at retail stores because consumers use the Web to get product information before they buy. The Internet also allows small companies to compete on a much broader scale than was previously possible, the foundation and others argue. Taxes will only stunt the growth of smaller companies that are trying to use the Internet to compete more effectively, they say.
But others point to the need of states for tax revenue. One of them is Cranston state Rep. Aram Garabedian, who said the state should find a way to make up for the loss of revenues created by increasing Internet sales.
”I think that’s a really major issue for state revenues,” Garabedian said. “Sales tax is so critical in Rhode Island. At some point, the government has to seriously address that issue.”
The commission is attempting to deal with it now. One of the hottest disputes it is attempting to resolve is the question of when a company has established a physical presence in a state, making it subject to taxes. Some would argue that a company has established a physical presence, or a nexus, in a state if it has a server that hosts a Web site there. Many, however, vehemently contest that assertion, saying that that is unfair to business. As Rosenker point out, if hosting a Web site in a state establishes a physical presence, does that mean that the company can vote there?
”That’s really the crux of the issue,” she said of the nexus question. “Someone shouldn’t have to pay taxes if they don’t have representation for paying that tax. The commission (will) very seriously look at that issue.”
But Rosenker added just because the commission is studying the taxation question does not mean that it will recommend that some type of tax be imposed on electronic commerce.
If a tax is imposed, however, The Internet Tax Fairness Coalition is pushing for the same rules that apply to e-commerce to be applied to mail-order, telephone, and all other forms of “remote” commerce. It is also seeking a system by which the states collaborate and form an agreement on how the taxing should be done, creating a simple system that is easy to understand, he said.
Rosenker said the commission will also take up the issue of how electronic commerce is taxed in other countries, and how the United States’ tax system will affect the competitiveness of its companies. She added that while the question of whether a federal tax should be imposed on Internet activity has come up, it has not met with much support from commissioners at their previous meetings.
