December 6, 1999

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Internet Develops Its Own Tax Code
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Internet, Death, And Taxes

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Tele.com A Taxing Problem Computer Reseller News ACEC: Meeting this week on Internet taxation

Contrary to some impressions, the Internet Tax Freedom Act doesn't prohibit taxation of goods sold over the Internet. It only places a three-year moratorium on domestic taxation authorities--federal, state, and local-- creating new taxes specifically aimed at Internet transactions.

The Internet Tax Freedom Act also established a moratorium on Internet-access taxes, which Rich Prem, co-leader of Deloitte & Touche's E-business tax-services group, says amounts to trivial tax revenue compared with the potential from Internet sales.

In the end, the Internet Tax Freedom Act merely bought time for legislatures and industry to figure out the best policy for collecting sales tax on E-commerce.

The focal point of Internet taxation is now on the third element of the Internet Tax Freedom Act: the authorization of the Advisory Commission on Electronic Commerce.

The Internet Tax Freedom Act charges the E-commerce advisory commission to recommend the best approach to taxation of sales of goods and services via the Internet by next April. Nineteen leaders from the public and private sector make up the commission. The commission's recommendation will likely guide Congress in passing legislation, if any, that rewrites tax-law precedents hammered out by the courts.

Prem, who attended a commission meeting this year, says the group is in broad agreement that some form of tax is reasonable to impose on Internet sales, just as brick-and-mortar retailers are required to charge sales tax. The rub, however, is that the commission must find a solution that makes compliance as simple and cost-efficient as possible for businesses.

From his observations at the meeting and his other investigations into the issue, Prem says the possibility of the commission recommending a continuation of the status quo is the least likely scenario. "They've heard a lot about what the challenges are; now they will look at solutions," he says. In particular, the commission will look at options when it reconvenes this month to examine proposals. All proposals for solutions to Internet taxation were due to the commission in mid-November.

Two basic constituencies make up the Internet taxation debate. Government agencies--particularly state, county, and city authorities--want to stop the loss of tax revenue through sales over the Internet, as well as eliminate the tax advantage remote sellers have over local businesses, KPMG's Johnson says.

Retailing industry groups, while fractionalized between traditional brick-and-mortar retailers and dot-com companies (though many retailers are now both), mostly want a system that doesn't burden them with onerous tax-compliance procedures.

But calls for a uniform sales tax across states, for example, appears untenable because local governments use taxes to address social, economic, and political issues for their constituencies, Johnson says.

According to sales-tax law, as outlined most recently in a 1993 case, Quill vs. North Dakota, a catalog or other remote retail company is required to collect sales tax only from customers who reside in those states where the company has a physical presence--referred to in legal terms as a "nexus." Through ensuing court rulings, a nexus has come to include a headquarters, distribution centers, retail stores, and other substantial operations.

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