VideoItem #1: States budgets are under severe pressure.
Item #2: Online retail purchases totaled $76 billion in 2002.
Item #3: Web transactions are not generally subject to sales tax.
You don't need a Ph.d in astro-physics to figure out Item #4. As Amazon.com CFO Tom Szkutak noted in a speech this month, the collecting of sales and use taxes on Internet purchases is "inevitable."
Szkutak stopped short of saying when the collecting would begin. But state governors, veritable blood hounds at sniffing out new sources of untapped revenue, are just dying to tax online sales.
Backers of the move point out that sales taxes account for half of all state revenues. And a University of Tennessee study showed that states probably lost around $13 billion in lost taxes on Internet purchases in 2002. That study also predicted states would lose $46 billion in lost online taxes by 2006 -- unless on-line merchants are required to assess and remit sales tax.
Etailers have long argued against such a move, insisting that it's nearly impossible to tell exactly where an online transaction truly occurs. Civil rights advocates also assert that validating an online customer's identity -- and hence their locality -- could very well violate privacy laws.
And so far, Congress and the courts have pretty much kept the Internet a tax-free zone. The Internet Tax Freedom Act of 1998 placed a moratorium on the taxation of Internet access and virtual purchases. A sequel, dubbed the Internet Tax Non-Discrimination Act, extended the moratorium. But that prohibition is scheduled to run out on Nov. 1.
Rep. Christopher Cox (R-Calif.) and Sen. Ron Wyden (D-Ore.) -- the pair that brought you the first two bills -- have introduced new legislation that would extend indefinitely the ban on new and discriminatory taxes on the Internet. "Given the continued softness in the tech economy," says Cox, "this is hardly the time for new taxes on the Internet."
But the main argument against Internet taxes is that, with 7,600 or so state and local tax jurisdictions in the U.S., it would be unduly burdensome to require online merchants to assess and then remit sales taxes.
To sidestep that issue, a goodly number of states have embraced the Streamlined Sales Tax Project (SSTP). The initiative, which was launched a few years back, is intended to simplify and harmonize sales and use tax codes. With a unified tax set- up, legislators argue, etailers will face fewer hurdles when collecting and remitting state and local sales and use taxes.
To date, 39 states (and the District of Columbia) have signed on with the project. That group has already reached a agreement to simplify their sales-tax rules. Lawmakers in those 39 states are now translating that agreement into their own state laws.
Over the next few months, several states will undoubtedly ask Congress to pass a law authorizing states that have substantially simplified their tax systems to require etailers to collect sales and use taxes.
The STTP states have also created a peculiar, pre-emptive tax amnesty plan. Under that set-up, etailers that begin collecting Internet taxes now will be granted amnesty for any taxes they might be found to owe later. Target, Toys 'R' Us, and Wal-Mart have already signed up for that program.
Getting businesses to pay taxes they don't owe -- and may never owe -- is a neat trick. Getting online merchants to eat a hefty levy on Internet transactions is a pipe dream. Experts say it's not very likely that etailers will lower prices on merchandise to help offset the taxing of their transactions. And make no mistake, a five to eight percent mark-up on prices will make the Internet a decidedly less attractive place to shop -- particularly since customers often pay a sizeable charge for the shipping and handling of Web-purchases.
While local jurisdictions may be fully justified in taxing online transactions (see legislative doctrine "You Make, We Tax"), such a move could have a chilling effect on virtual sales. As Tech Strategies reported last week, online sales have quietly been inching upwards of late. But online taxes could squash that growth, a prospect that has corporate executives -- particularly tax managers -- fretting.
Indeed, in a recent survey of tax executives conducted by Big Four accountancy KPMG, respondents cited the Streamlined Sales Tax Project as the top issue relating to jurisdiction to tax. The survey also found that more than half of the respondents expect the initiative (and similar tax issues) to influence their company's ability to compete domestically and internationally over the next five years.
Just how concerned are these 131 tax managers about taxes in space? According to the survey, respondents are more worried about the Streamlined Sales Tax Project than they are about a possible federal consumption tax. That should tell you something.
Says Timothy Gillis, partner in charge of the Washington national tax group of KPMG's state and local tax practice: "In an economy with an increasing emphasis on the global, digital and intangible marketplace, many tax practitioners agree that jurisdiction to tax will be the most important tax issue of the next decade."
He's not exaggerating. About 45 percent of the respondents in the survey said they believe their company's compliance efforts will be more complicated by tax jurisdiction issues in five-to-10 years. Another 30 percent said they expect such issues to make compliance more time-consuming.
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