Internet sales tax ambush?

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Over the past few weeks, every e-commerce entrepreneur and Internet innovator has been breathlessly watching the congressional debate on whether we should lift the moratorium on Internet sales taxes.

Asking this question now is like asking Mrs. Lincoln about the play. To tax or not to tax will never be an appropriate question, simply because the net gains in tax collections (albeit in the billions) will never be greater than the cost to e-commerce entrepreneurship and innovation and the jobs and wealth produced through their efforts.

As we all know, there is pressure to tax e-tailers, but this time it isn't coming from the traditional retail industry. Today, state governments -- seeing a potential revenue goldmine -- are likewise pushing Democrats in Congress to allow them to mandate collection of taxes on interstate online retail transactions. The 45 states that have sales taxes in place derive more than half of their revenue from this single source. Spurred on by challenging budgetary times and unwilling to make substantive cuts in even the growth rate of spending, many state and local officials increasingly believe that taxing Internet sales can play a key role in solving their own budget shortfalls.

According to a widely cited study, issued by the Institute for State Studies and prepared by two University of Tennessee professors, states collectively "lost" $13.3 billion on untaxed Internet sales in 2001. Tracking the growth of online retailing, they forecast that such uncollected taxes would triple by 2006 and that the cumulative lost revenue would total $439 billion by 2011. These projections have come under fire for being based on flawed assumptions and being inflated by as much as 85 percent.

Voluntary efforts at Internet sales tax collection simply aren't generating sufficient revenue to offset the free-spending ways of the states. Thus, under the guise of tax simplification, 42 of the 45 states that have retail sales taxes in place are participants in the National Governors Association's Streamlined Sales Tax Project. This NGA-led project is seeking to standardize sales tax laws, making them "e-commerce-friendly," and to push for congressional action on the Streamlined Sales and Use Tax Act (S. 1736). This bill would enable only states that participate in their project to be allowed to collect sales taxes on cross-border online sales. The clear signal to all e-tailers is watch out -- we're coming after you for sales taxes.

Under current federal law, an Internet merchant must charge applicable sales taxes only for shipments to states where the seller has a physical presence. For instance, Wal-Mart has stores in all 50 states, but its Walmart.com subsidiary has a physical presence in only nine states. Earlier this year however, the megaretailer "plea bargained" with several states to begin collecting sales taxes nationwide in return for amnesty on any back taxes. Several other large retailers, such as Target and Toys R Us, have struck similar deals. To them, the administrative cost of collecting sales taxes online is manageable, while also perhaps driving more traffic to their physical stores.

The same option is not available for the bulk of online retailers, who are e-entrepreneurs. In reality, they would not be dealing with just 45 states. Rather, they would face the daunting prospect of complying with more than 7,500 overlapping and multilayered taxing jurisdictions in the U.S. today, further complicated by the need to handle today's sales tax exemptions for items such as food and prescriptions and even the various states' popular "tax holidays."

While this may create a boom for tax compliance solutions providers, this opportunity would come from the unnecessary creation of an unwieldy regulatory nightmare for even the best intentioned business.

Most importantly, however, the economic proposition for consumers to shop online would be fundamentally changed. This is because the 5 percent to 10 percent difference in prices represented by sales taxes that most consumers formerly had to pay would disappear. This would lead directly to a dramatic decrease in online sales, profits and employment. "At the end of the day," says Ed Foy, chief executive officer of eFashionConsulting, "we're talking about layoffs. And that ultimately means less tax money going to the states, and no one -- not the government, the consumer or business -- wins." His thoughts are echoed by e-entrepreneurs everywhere.

Congress should thus take this opportunity to reject the liberal-backed Internet tax enabling bill and instead, enact a permanent ban on all forms of Internet taxation before the holiday recess. This is a battle with huge ramifications for the future growth of e-commerce and, indeed, the American economy.

Moreover, if the Internet is seen as a tax panacea for states struggling with their budgets, leading economists have already speculated the idea could spread across the globe. This would mean American e-entrepreneurs would face being the world's online tax collector. It's time to end this ridiculous nonsense and heed the call of Commerce Secretary Don Evans, who said, "The Internet is an innovative force that opens vast potential economic and social benefits of e-commerce, and government should not stifle e-commerce through multiple or discriminatory taxes," Amen.

David C. Wyld is the Mayfield Professor of Management and director of the Strategic e-Government Initiative at Southeastern Louisiana University. He can be reached at dwyldselu.edu.