Perspective: Internet taxes? It's just a matter of time

When the Supreme Court in 1992 exempted out-of-state mail order retailers from collecting most sales taxes, the online world was still waiting to be invented.

In fact, the court's decision did not even mention the word "Internet." No mystery. At the time, Marc Andreessen was wolfing down cheeseburgers with his buddies at the University of Illinois at Urbana-Champaign while other future cyberstars such as Jeff Bezos and Pierre Omidyar were just ambitious nobodies.

The cybergeneration's period of grace comes with an implied statute of limitations.

Then a dispute between a mail order office equipment maker called Quill and the state of North Dakota scrambled the rules of retail competition. Like many a direct marketer, Quill had no physical presence or personnel in North Dakota. Always on the lookout for new tax revenue, the state government decided to change its definition of "retailer" to include out-of-town mail order outfits. So when the local tax man came knocking, Quill sued.

The Supreme Court came down in favor of Quill, writing a decision that by extension proved to be a boon to the sundry e-start-ups populating the high-tech landscape later in the decade. With their lower cost of overhead, many Internet-based companies, such as Amazon.com and eBay, went on to thrive.

The $64,000 question is whether all these cyberphenoms would have failed had the Quill decision not gone their way. Sort of like asking whether Muhammad Ali could have taken Rocky Marciano--a great topic for bar bloviation but impossible to answer definitively.

Thirteen years later, Internet retail is far removed from its fledgling beginnings. Online retail exceeded $65 billion last year. But success may exact its own cost. Because times have changed, there's now a move to get rid of protective rules that critics condemn as outdated.

Some estimates reported by The Washington Post put the total lost state revenues from untaxed Internet sales in the neighborhood of $16 billion in 2003. With states under increasing pressure to make ends meet, governors are hard-pressed to understand why Internet retailing should any longer qualify as a special case.

That's inspired a move to roll back the freebies. Earlier this month, for example, tax collectors from 18 states announced an interstate agreement on uniform sales tax regulations. They also pledged to supply businesses with software to help them collect taxes online. After so many years, these folks say, it's time to let the Internet industry stand on its own two feet.

They can expect a fight. Powerful groups know how to work the system to their benefit. Unsurprisingly, previous demands for the mandatory collection of sales taxes on mail and online transactions have gone nowhere. Even though pro-tax bills got introduced in 2000 and 2003, neither made it out of committee for floor votes in the House or Senate.

I suppose the tech industry's lobbyists can always fall back on the argument that e-tailers would face an undue burden on interstate commerce if compelled to comply with a multiplicity of state tax laws. But the cybergeneration's period of grace comes with an implied statute of limitations.

The Supreme Court's Quill decision included a hint. Writing for the majority, Justice John Paul Stevens said that "the underlying issue is not only one that Congress may be better qualified to resolve, but also one that Congress has the ultimate power to resolve."

Translation: The clock is ticking.

Biography
Charles Cooper is CNET News.com's executive editor of commentary.

More Perspectives

Is Internet retail mail-order?

Even though I enjoy not having to pay sales tax
on things I buy from Internet retailers, I have
to say that I perceive those businesses as
mail-order businesses. I fail to see how having
a web-based catalog and ordering system is
semantically much different than a paper catalog
and order sheet. Moreover, the goods arrive via
the same parcel delivery mechanism.

I hate to say it, but it makes perfect sense to
simply treat Internet retailers precisely as we
have their traditional mail-order predecessors.

That is to say, if they are foreign, you pay
whatever tariffs are necessary for import. If
domestic, they collect sales tax if they have a
physical presence in your state, otherwise the
onus is on you to render the appropriate tax
payment to your state on your own initiative.

Not that I'm in favor of the way sales taxes
work today, it's just that I don't see the logic
in the distinction solely on the basis of the
involvement of the Internet in the transaction.

[Collants]

Someone's bound to collect on e-success some day.

This article just makes sense to me. With posted retail sales in the billions for eBay and Amazon, it's just logical that some government out there wants to cash in on this. Implementing taxes on Internet sales might be quite ugly before it gets easier for the small retailer. I can just imagine a e-shop having to figure out taxes for every state in the nation.

Marciano versus Cassius Clay

Forget Ali, the Clay that beat Liston with a feather duster punch was the real thing. His victory over Foreman was a con-job. Foreman punched himself out and almost fell over on his own feet.

And, hey Marciano never lost, Clay did. And guys who have never lost in boxing, well, those guys have all the confidence.

I'm not saying he was a better fighter. Or had better footwork, or was as quick. And he was shorter with less reach. And he fought at too low a weight. But remember Clay was a light heavyweight when he took gold in Rome.

Marciano was a winner. Only age and honest referring could steal from Rocky.

[Jane in KC]

Internet Taxes

Internet sales are taxed now *if* the retailer has a physical presence in the state to which the purchased item is delivered. This follows the rationale of the case regarding catalog sales and is reasonably fair. In Missouri, one must sign a sort of affidavit annually saying that out-of-state purchases over a certain amount ($2,000?) have not been made without paying Missouri taxes. While I don't believe this is directed at internet purchases, I suppose it could be applied.

One aspect of internet shopping I have not seen addressed is that of the convenience to the handicapped or aged or those otherwise unable to drive to shopping areas. This is an important consideration, and extra taxes should not be placed on these purchases and added to the unadvoidable shipping costs.

We do not need a change to the current law regarding internet taxes, no matter how greedy state governments may feel on any given day.

[IT-Troy]

Use Tax

Are all business required to pay Use Tax on purchases made that did not get charged sales tax? I don't know if individual consumers supposed to pay Use Tax on these same type of orders? The company I work for switch to charging sales tax all orders to all stats, and most of our business clients were grateful not to have to do the extra paper work to fill their Use Tax.

Besides the states reaping more tax, I think mail order, and web order sales tax would help local merchants that usually provide more value than web centric, and or of state merchants.

Well. . .

It's my understanding that consumers are supposed to pay the use tax, just like we pay sales tax. In Michigan, we're supposed to report our out-of-state purchases and pay use tax on it.

It's a pretty desperate move, since most people will be lucky if they still have those receipts. Of course, Michigan lets you just have it automatically figured based on your income, but I doubt most people even do that.

Stop whining about "lost" revenue!

Hey Washington Post! One state doesn't "lose" revenue because a business is doing well in another state.

The buyer in your state that saved a few pennies on the online purchase still pays property taxes (unless they are connecting to the Internet through a Wi-Fi connection in their cardboard box under the Interstate), state income taxes (unless they are fortunate enough to live in Texas, Florida, or Washington State), taxes on gasoline for their car (unless they are a nutcase like the Unabomber) and a myriad of other taxes.

The business that sold the item employs workers who each pay the myriad of taxes. The business pays taxes (unless they are big enough to have lawyers setting up multiple tax shelters for them, but even then those lawyers pay taxes as individuals).

I guess the Washington Post didn't know the issue of Internet taxation was settled years ago http://www.techcentralstation.com/111402D.html

One more reason to get my news from CNET rather than WaPo...

[Maxxam]

internet sales tax

We already pay sales tax if the vendor is in the same state as the purchaser. So, what is their basis for creating new legislation? Job security? I shop online and compare the prices baed on cost of item, cost of shipping and cost of sales tax. If it is cheaper than I can buy at a B&M, then that is where I buy. If it is more expensive, no sale. Simple as that. It is just like a catalog purchase.

[ssalava]

Connecticut Rip-off

As a homesick Texan, I lived in Connecticut from 1996-19998. When I filed my Connecticut state tax returns, the forms (and TurboTax) insisted on me declaring out-of-state mail order/internet purchases so that I could pay the sales tax on behalf of the vendor who failed to collect it from me.

In December 1997, I made an internet/mailorder purchase a $750 Canon camcorder from Camera World of Oregon to record my child's birth that next month.

To avoid a dispute, I declared and ended up paying the $50-60 bucks extra - gnashing my teeth while doing so -- and fueling my desire to get back home to my no-state-income-tax home as fast as I could. That's because I had heard the State of Connecticut ~IRS tax wonks audited UPS/FedEx records for out-of-state deliveries into Connecticut residences.

Now it seems I should have not paid and fought them using the 1992 Supreme Court decision that Charlie refers to.

Lesson learned. (home with the armadillo)

[Razzl]

Connecticut's charging you a "use tax"

Steven, the tax you paid was the "use tax", not a "sales tax". Connecticut and several other states have tried to get around the out-of-state sales tax problem by claiming the right to tax the "use" of the goods by their residents rather than the buying of the goods. It is a transparent attempt to circumvent the clause in the US Constitution prohibiting states from levying "tariffs" on goods shipped from other states. Unfortunately, no individual or organization has been bold enough to sue Connecticut or Michigan or wherever to begin the process of eliminating this unconstitutional tax. If you're willing to volunteer to be the test case, step up to the plate...

[ChazzMatt]

whose money is it?

QUOTE:

"Some estimates reported by The Washington Post put the total lost state revenues from untaxed Internet sales in the neighborhood of $16 billion in 2003."


See that's the liberal media mind set. why are they considered "lost" state revenues? why is it assumed that's the state's money? "Lost" is when you have ownership and you don't have posession. If people weren't buying online there's no guarantee they would buy local, where the states have established their right to the money. Local is more driving time to stores, usually higher prices -- due to tax, etc. So, if forced to buy local, there's a lot of stuff people just wouldn't buy. Therefore online sales aren't "lost" revenue for the states, it's just another revenue stream they can't get their hands on.

That's like saying e-mail caused "lost" revenue for the post office, therefore we should start charging tax on all e-mails to make up the difference for the poor postal authority. and so many people were scared that was going to happen that there's been lots of hoaxes on that subject. Yet, people send LOTS more e-mails than they ever sent letters because it's easier and less expensive. If you started charging a tax on e-mails because the liberal mindset is that everything you do should be somehow owned and controlled by the government -- and taxed! -- then e-mail would diminish considerably.)

QUOTE:

"With states under increasing pressure to make ends meet, governors are hard-pressed to understand why Internet retailing should any longer qualify as a special case."

Because I already pay a state income tax. Therefore my money has been taxed once already. now, what I DO with that money is no one's business. the state government doesn't own my money. the only reason we pay a sales tax is because the state government also taxes the businesses' money. that's THEIR "income" tax. that business operates in the community, using community services -- although they pay for that too -- water and electricity aren't free. but because they have a physical presence, they pay taxes to that community or state. the tax gets passed on to the consumers of course -- no business ever actually pays a tax, the customers do. but, if a business has NO presence in a state and if I have already paid MY income tax -- what right does my state government have to step in between me and an out-of-state company and try to take money? NONE. Unless they think they own my money and that I have to pay a tax just to spend my own money.

Just to clarify. . .

I do believe most businesses do pay a state income tax, unless of course they manage to keep deferring it as many companies do. However, sole proprietorships and partnerships pay income tax essentially the same way people do, since the state does not recognize the owners and their business as separate entities in these cases.

Sales tax is indeed a tax on you. The only logic I see for having both a sales tax and an income tax is to try to break them up so the effects on you are less noticeable. It does seem strange that states complain so much about lost revenue when they simply could raise income taxes or other taxes to compensate, but I guess that's not politically correct or something.

Otherwise, I pretty much agree with what you said.

[ChazzMatt]

just like the mafio

What it comes down to is not a matter of logic but a matter of money. All the rules of logic the states have used over the years to convince you they need a share of your money is being overturned by new techonologies like the Internet. That's why there's so many taxes on gasoline and regular phone service. it was a necessary product for most consumers and the government concocted elaborate lines of reasoning as to why they should be taxes, because of "services" provided. But, as hybrid electric cars take over and become fully electric cars in the next few years, watch the states scramble to somehow justify taxing "recharges" or something. and as VoIP transcends the regular wired phone service, watch for taxes to be added to that. why? what justification? it's existing FINE without taxes, there's nothing that the government is providing that these new services need. so, why would they be taxed? because it's a major stream of revenue and the government wants a piece of the action.

Forget logic, just give us your money. The mafia used to work that way. they would see a successful nightclub or garbage pickup service that was making a lot of money and they would go to the owner and demand to be made a partner or weekly "protection" money payments. the owner would say, "but I don't need a partner and I don't need protection." and the mafia would show him that yes, he did. they didn't do anything to build the business, but they sure wanted a cut of the money. just like the government.

[garbuck]

Internet sales should be treated the same as MOTO

It makes no sense to treat internet sales any differently than mail order / telephone order.

Consider: If internet is taxed, but traditional mail or phone ordering isn't, then I would just shop online as usual, but instead of hitting Check Out when I'm done, I would call the 800 number with my credit card at hand or print out the shopping cart, fold it up and stuff it into an envelope with a check!

[cmbhome]

Look what's happened in Australia

To bring some parity and sense into multiple disparate state taxes, The Australian federal government introduced a national "Goods & Sales Tax" (GST) on 1 July, 2000. The am was to collect taxes uniformly and distribute the revenue back to state governments, on the understanding the state governments would remove various disparate taxes to balance out. It seems to have worked out OK... Why couldn't that work in the US? Then none of the state governments would "lose" revenue, and the tradition of shipping to a friend's out of state address, which is wasteful and inefficient, as well as being an illegal avoidance of tax, would end...

It might. . .

. . .but it'll certainly take more time over here. We even have some local governments charging sales tax. I think there's one in California that has three different rates for different areas. So, assuming it happens, it'll take a while.

And I think until the state and local governments get their act together and simplify everything for online, mail order, and other out-of-state retailers, I don't think those retailers should be expected to collect it. There is a system here for creating uniform legislation between states, so they should be able to do it. They just need to stop whining and do it.

I, for once, don't care if I have to pay sales tax for my internet purchases--I don't shop online to avoid the taxes. Still, I don't think it's fair to expect online retailers to try to develop a system to collect sales tax from everyone without creating a uniform structure for said tax. If the federal government could push a solution on them, great. . .I think the commerce clause would give them the authority.

Probably wouldn't stop the whining, though.

cut spending first or nothing is accomplished

The tax "problem" resides in the following quoted from this article

"Some estimates reported by The Washington Post put the total lost state revenues from untaxed Internet sales in the neighborhood of $16 billion in 2003. With states under increasing pressure to make ends meet, governors are hard-pressed to understand why Internet retailing should any longer qualify as a special case."

The only reason states are under "increasing pressure" today is because there is no effective cap on (1) the ranks of municipal employees who are paid from tax collections, or (2) the do-good missions that various pressure groups want funded (at someone else's expense). Giving ANY new tax money to state governments that have proved time and again unable to live within reasonable budgets is self-defeating and stupid.

Unless and until the taxpayer gets a direct say in the size and mission of state government, absolutely no new tax money (or methods of collecting such money off the Internet) should be allowed. Ordinary voting is now too far removed from where the political decisions are made that end up costing everyone more in tax obligations. Something better and more efficient is desperately needed.

I envision a public electronic forum replacing the influence-peddling now conducted by lobbyists and their ilk. Under this system, no state government could raise or allocate any tax money without approval of the forum, nor could it increase staff on the public payroll, change the basic mission of established government services, or add new services without forum approval.

For example, public schools would educate, period. They would no longer serve as sports training camps for a minority of students seeking athletic careers, nor would they all be obligated to adapt to the special needs of any other minority group whose demands for special education far exceed any possible benefit from compliance.

This is what needs to be done across the board, otherwise the demand for tax money will forever exceeed what is fair and reasonable to collect.

Sales Tax - we don't have no stinkin' sales tax

Here in Oregon, we do not pay a sales tax on anything. Go buy a meal and the price you pay is the price shown. Buy an automobile, pay only the negotiated price, plus less than $100 to get it titled and registered. [BTW-No prpoerty tax on teh car either]
I can often buy at retail for les than the shipping and out of state sales tax.