clock menu more-arrow no yes mobile

Filed under:

Internet Taxation, the State's Perspective

There is a tremendous amount of confusion and exaggeration when it comes to "Internet Taxes".

There are two main issues here:

  1. Internet Tax Moratorium The federal government has passed a law to prevent states from taxing Internet access (AOL, mindspring, etc.) and to prevent multiple and discriminatory taxes. No one is really sure what multiple and discriminatory taxes are, but Congress is dead-set against them. Apparently, if the ban on access taxes expires, its supporters predict armegeddon for the internet and everyone's email will be taxed. This is what is know in Washington as demagoery. Taxing each email is an urban myth that doesn't belong in a real debate about internet taxes.
  2. Sales Taxes Currently, brick and mortar stores collect sales taxes, while their online and catalog competitors are not required to collect sales taxes on the sale of the same goods to the same customers. This is fundamentally unfair to Main Street stores and is costing the states billions in lost revenues (the General Accouting Office estimated that states could be losing up to $20 billion in lost revenue in 2004).

The inequity in the collection of sales taxes is due to Supreme Court's 1992 Quill decision, which held that remote retailers (catalogs, etc) could not be forced to collect sales taxes unless the remote retailer had a physical presence (store of warehouse) in the state of the buyer. The Court ruled that there were too many rules and rates across the various states. So Amazon and LL Bean don’t collect sales taxes in most states. However, when the retailer does not collect the sales tax, the consumer is required to pay a corresponding use tax to their home taxing jurisdiction. However, compliance with use taxes is very low.

The states have responded to the Supreme Courts concerns and 35 states have signed onto The Streamlined Sales and Use Tax Agreement (SSUTA), which was approved in November 2002. The agreement outlines a uniform system to administer and collect sales taxes. The business community worked very closely with the states to develop the comprehensive system to simplify and streamline the states' sales tax rules. 20 states have already enacted legislation to change their sales tax laws and implement the terms of the Agreement.

In the Quill decision, the Supreme Court advised that allowing states to require collection by remote retailers is an issue that, "Congress maybe be better qualied to resolve, and one that it has the ultimate power to resolve." Therefore, ngress needs to provide states that implement the Agreement with the authority to collect sales taxes from remote retailers. Adoption of the Agreement and Congressional authorization will provide a streamlined system of state sales tax rules and a level playing field for brick and mortar and remote retailers. Also, the legislation under discussion in Washington would only apply to retailers with remote taxable sales over $5 million, so small retailers (and the DBR) would not be forced to participate. However, sophisticated, large retailers should play by the same rules as Main Street stores.

The states are currently opposed to the Internet tax moratorium because of some overly broad definitions of "Access" that could lead to many telecommunications devices brought under the definition of Internet access. It is unclear how wireless internet, DSL, cable and other bundled services would be treated under the moratorium. Many billions of telecommunications tax revenue is at stake for the states. Also, there is also a legitimate question about why the federal government should be telling states what they can and can't tax. Is that a conservative philosophy? And why do we have a national policy that forces your local bookstore to collect sales taxes, while exempting from collecting the same taxes. The government should not subsidize on channel of commerce over another.

I hope this email points out that your description on the front page that:

Unless the moratorium is extended, there will be taxing frenzy at all levels of government, and just figuring out how to pay taxes, let alone how many will be assessed, is going to drive us all crazy. Worse, it could run small sites like ours right out of business.

Is clearly an exaggeration and based more on rumor than fact.