- The Washington Times - Friday, November 2, 2001

''It's just not fair!" Parents often hear these words from children who want the new toy that "everyone else has." Unfortunately, some state governments have a selfish demand of their own for Congress: Allow them to form a cartel capable of taxing most purchases made on the Internet. Virginia gubernatorial candidate Mark Warner may be sympathetic to this ploy, having recently stated that tax policy can't "continue to put bricks and mortar [businesses] forever at a disadvantage" with e-commerce firms.
Taxpayers may believe that the recent expiration of the moratorium on special Internet access taxes will give states what they want. In reality, the moratorium which may be renewed by next week is a bargaining chip in a bigger tax scheme proposed by the National Governors Association (NGA), a club Mr. Warner hopes to join. If Congress continues to deny states new taxes on Internet access, the NGA demands that states be allowed to charge existing sales taxes on Internet purchases. But this bargain is based on myths about "fairness."
Myth: E-commerce purchases are currently "tax-free." The price of every good sold over the Internet reflects the income, property, payroll and other taxes that the online seller is already paying. The shipping costs that customers pay for these items often include fuel and other levies that deliverers pay in the course of fulfilling an order.
In addition, Internet firms and their customers, who rely on phone lines to do business, pay conventional telecommunications taxes that may not burden traditional retailers quite as heavily. According to the Federal Communications Commission (FCC), a typical metropolitan-area phone bill is taxed at a rate of 15.7 percent.
Myth: E-commerce purchases aren't subject to sales taxes. An Internet purchase between a customer and a seller who has an "actual physical presence" in the same state does obligate the seller to collect that state's sales tax. This "nexus" standard was established by the Supreme Court's Quill decision. The NGA's proposal would turn this reasonable definition on its head, and create a system of "trusted third parties" that could collect and send sales taxes on Internet purchases from remote sellers back to the jurisdiction where each e-commerce customer lives.
Why should a merchant or his "trusted third party" collect taxes for a government whose services he may never need? Where would the taxable event occur in a sale involving a firm headquartered in one state and a buyer in a second state, which was facilitated by a server in a third, and shipped from a warehouse in a fourth?
Myth: Online sellers hurt traditional businesses. While some predicted that "Mom and Pop" stores would be driven to the poorhouse by e-commerce, many took a detour into cyberspace instead. According to the research firm IDC, 5 million small businesses had established an Internet presence by the end of 2000 a yearly growth rate of 35 percent. The Department of Commerce predicts that "85 percent of small firms will be conducting business over the Internet by the year 2002."
Now, large retailers have taken up the tax drumbeat to insist upon a "level playing field," even though this traditional team still has plenty of unique talents. Shopping malls have become centers of social activity for teen-agers and retirees alike, and consumers still prefer to shop in person for their own food. The advent of television did not destroy radio, the rise of VCRs did not cause the fall of theaters and e-commerce won't mean the death of stores.
Myth: E-Commerce will starve governments of needed funds. The NGA touts a worst-case study claiming that, by 2011, "uncollectible" state and local sales taxes attributed solely to additional e-commerce activity (and not due to other sales-tax problems) would be $29.2 billion. Yet, even this estimate would amount to just 2.9 percent of total state revenues. Others say that the current e-commerce structure is a windfall to states because of the other revenues a robust tech sector generates.
Still, other studies suggest that more taxes on e-commerce could cause NGA's gloomy prophecy to become reality. Economist Austan Goolsbee estimated that online expenditures would fall 30 percent if blanket sales taxes were applied to Internet purchases. Thus, the short-term gain in sales tax collections could later turn into long-term pain, as decreased economic activity depresses the overall tax take.
States have seen inflation-adjusted revenues grow by 2 to 7 percent in each of the past eight fiscal years, a significant share of which came from the hides of all businesses. Congress can avoid making this bad tax situation worse by reinstating the moratorium on Internet access taxes, and codifying into law the sensible "nexus" standard for e-commerce taxes crafted by the courts. Governments at every level should then concentrate on rolling back the taxes that afflict traditional as well as online businesses.
Virginia's current governor, Jim Gilmore, saw through the NGA's agenda and stood fast against unfair e-commerce tax hikes. Virginia's next governor should pledge to do the same. Sometimes, the most responsible thing a parent (or a politician) can say is "no."

Pete Sepp is vice president for communications with the National Taxpayers Union.

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