TCS Daily

E-Commerce: The Counter-Revolution

By George A. Pieler - February 28, 2006 12:00 AM

Tax collectors have targeted electronic commerce for fresh revenues ever since Ebay, Amazon, and proved they were serious about revolutionizing retailing. The war has been fought on two fronts: taxing the internet services that make electronic retailing possible; and generating revenue directly from online sales themselves.

In the US at least, the first front has been blocked by legislation: the Internet Tax Freedom Act (ITFA) has for the most part cooled down Internet tax fever since 1998. The second front is a bit more dicey, the main constraint being Supreme Court precedents which bar states from taxing out-of-state vendors that lack a proper physical presence in the state. Now both fronts are under assault from tax authorities.

Last month the General Accounting Office proclaimed that notwithstanding ITFA, states could tax certain services that exist only on the Internet, such as telephony (VoIP) and broadband video. The GAO report is another wrinkle in a longstanding dispute: last year the Joint Committee on Taxation suggested "rationalizing" the federal telephone tax by extending it to these same services, plus others. That trial balloon was shot down, but the idea just won't go away.

Meanwhile, a consortium of states has created the so-called Streamlined Sales Tax Project, a one-stop revenue collection device aimed at cross-border sales. The SSTP will divvy receipts from those sales among participating states by formula. Right now the system is voluntary, with a temporary amnesty program to lure businesses into compliance, in return for a pledge not to seek back taxes. Even so, the SSTP aspires to become a de facto national sales tax system with a legislative imprimatur from Congress -- if that happens, business transactions that cross state lines would be forced into the system.

What's wrong with this picture? After all, no one ever said the Internet, or commerce conducted thereon, would be forever exempt from taxes. Isn't it time to take the Internet out of the incubator stage, and let it compete fair and square with more traditional commercial arrangements?

Well, actually the Internet as a commercial venue already is heavily taxed. E-commerce sales, like mail-order sales, are taxed directly if a business has a genuine physical presence in the taxing state, as many national retailers do. Barnes &, for example, automatically charges sales tax at checkout. States and localities have their own telecom taxes which are charged against cable and high-speed Internet services. What federal law prohibits are special charges on Internet access per se, as well as duplicative taxes on the same services, including different states trying to tax the same thing.

Physical location is dwindling as a proper parameter for levying taxes, and a more sensible adaptation would have states move to a territorial, point-of-origin approach to transaction taxes (rather than focus on the point-of-delivery, i.e. where you and I reside as purchasers). For that matter, the U.S. as a whole should give serious consideration to a territorial approach, as even President Bush's tax reform advisory panel noted last year.

George A. Pieler is Senior Fellow with the Institute for Policy Innovation and former Tax Counsel to the Senate Finance Committee.



Too much would have to be changed if the US moved to a territorial approach as suggested by George Pieler. Moreover under such a solution only the selling states benefit from the transaction tax while the consuming states that provide the services suffer.

If the SSTP revenue collection device/payment module receives legislative imprimatur from Congress, it could be used mandatorily by all merchants, to distribute the transaction tax directly to the coffers of the merchandise destination state.

Gilbert at CSULA, State and Local Taxation

The law of unintended consequences
Make any tax oppressive and people find a work around. The current sales tax laws are ridiculous. Here in Wisconsin, medicine is taxed but food isn't. Just a few miles south in Illinois, food is taxed but medicine isn't.

And to complicate things further, here cookies are not taxed but chocolate bars are, while in Illinois, Head-n-Shoulders is considered a medication, and is not taxed, while ordinary shampoo is considered a beauty aid and is taxed.

The folks that get fired from the IRS for making things too complicated evidently get jobs with State and local taxing bodies.

And now the government is going to force folks that are having an electronic equivalent of a garage sale figure this out?????

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