Sat, May 05, 2001 page19

• Tax moratorium shields Internet to nurture industry

  In the long-run, the Internet will be taxed. It just will not be before the next US election

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  Over the past several years, the US Congress has treated the Internet as the fair-haired boy of American industry.

  In 1998, lawmakers enacted a ``moratorium'' that protects Internet businesses from federal and state taxes on everything from user access to downloading data, ostensibly to nurture an infant industry. They're about to renew it for five more years.

  ``What's been happening is that both parties have been competing for the high-tech sector -- for contributions and for votes,'' said Andrew Laperriere, political economist at International Strategy & Investment, explaining the congressional largesse.

  The politicians also want to bask in the Internet's popularity, Laperriere said. ``They want to show they `get it' with the New Economy,'' he said. ``The only issue that gets more support on Capitol Hill is that of saving the family farm.''

  Now, debate is heating up over a controversy that was sidestepped in the 1998 legislation, yet goes to the heart of how far lawmakers should venture in shielding the Internet from the taxes that burden other US industries.

  The question is whether states should be able to collect sales taxes on transactions made over the Internet, as they do in the case of brick-and-mortar stores. States -- and some non- Internet businesses -- argue they should. On-line firms say no.

  Important issue

  The issue is important. So far, e-commerce, as on-line sales are known, has been getting something of a free ride. On-line vendors are able to offer customers deals unencumbered by sales taxes and -- in some cases -- shipping and handling charges.

  Although on-line sales still constitute a relatively small portion of the economy -- they totaled US$8.7 billion last year, according to the Commerce Department, about 1 percent of all retail sales in the US -- they're expected to grow rapidly.

  While the 1998 law didn't specifically prohibit states from collecting sales taxes on Internet transactions, the US Supreme Court outlawed it in a ruling in 1992, and lawmakers have been pushing to reverse that as part of any new legislation.

  Yet, compromise is proving elusive. This week, the Senate Commerce Committee canceled a bill-drafting session scheduled for yesterday morning because panel members couldn't agree on how to handle the state sales-tax issue.

  The 1998 law expires in October and must be renewed if the other protections that Congress has erected against Internet taxation are to continue. On the surface, the sales-tax issue seems simple. If retail stores must collect state taxes on over-the-counter sales, then it's only fair that Internet transactions follow the same rules. And why should states lose sales tax revenue, advocates argue? Yet, it's not quite that cut and dried, analysts say. While on-line sellers don't usually collect sales taxes, they sometimes charge for shipping and handling, which for purchases below US$150 add on more than sales taxes ordinarily would take. Indeed, the retailers themselves are split, concedes Frank Julian, operating vice president of Federated Department Stores Inc, which owns Macy's, Bloomingdale's and other big shopping-mall anchors and is active in interstate sales as well.

  Right now, 7,600 state and local governments impose sales taxes, each with different rates and exemptions, Julian points out. Collecting them all would be a nightmare, he says -- even with today's advanced computer software.

  Sales tax issue

  Catalog vendors aren't required to collect state sales taxes on orders from states where they have no on-the-ground outlets, but in cases where they've built local stores to supplement their mail-order business, they must collect sales tax for that state.

  ``The real issue is whether states are willing to simplify their sales-tax rules,'' Julian said, with each state adopting a single set of rates and rules that would cover both its own sales tax and those imposed by its localities.

  Indeed, it was this kind of complexity that the US Supreme Court cited in prohibiting states from imposing sales taxes on so-called remote transactions, such as on-line sales. It said forcing firms to follow so many sets of rules would be unfair.

  The difficulty is, it isn't easy for some states to make such changes, says Stan Sokul, a tax specialist with Davidson and Company, a Washington firm that has been following the controversy closely.

  Wyoming has moved toward working out a single standard, but New York -- whose biggest city has its own ideas about sales taxes -- undoubtedly would find it harder. Persuading the bulk of the states to go along is proving an even more difficult job.

  As sometimes happens in Washington, the Commerce Committee's stalemate centers on an even narrower issue: Whether to require the states to consolidate their tax systems before or after Congress grants them authority to collect taxes on e-commerce.

  Panel split

  Panel members are split over competing proposals -- and apparently are unwilling to yield. A similar issue exists over how far a state's reach on business activity taxes should go. Would locating a server within its borders constitute a local outlet? What will happen over the next few weeks still isn't clear.

  Laperriere predicts that eventually lawmakers will simply shelve the sales tax issue again and renew the 1998 legislation. The House already has voted overwhelmingly to extend the moratorium.

  If the 1998 bill isn't renewed, it will open up the Internet to a variety of previously prohibited taxes, Sokul predicts -- including levies on access charges and taxes on downloading information. In that case, most analysts say, states would make token moves to simplify their tax systems and throw the case back into the courts. ``In the long-run, the Internet will be taxed,'' Laperriere said. Just not before the next election.
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