Net Taxes: Add to Cart?

A new bill in Congress would ban Internet taxes outright. But state governors have a slightly different plan in mind.
John GoffMay 22, 2003

Item #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.

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You don’t need a Ph.d in astro-physics to figure out Item #4. As 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.

It’s unclear how corporate tax departments will cope with an Internet sales tax. But here’s a clue: to deal with increasingly complicated jurisdiction-to-tax issues, 23 percent of the tax executives surveyed said they would utilize more technology. Even software may not be enough, however. About 15 percent of the respondents said they would add more training for their staffs.

Nevertheless, governors keep flogging the Streamlined Sales Tax Project as if it were the salvation of the entire capitalist system. “The inequities in the process are so strong we are compelled as a country to fix them,” claims Utah Gov. Michael Leavitt, a strong backer of the proposal. “If we eliminate the friction between many different parts, then we will create an economic engine for growth in the 21st century.”

An Internet sales tax will create an economic engine for growth, alright — for state governments. It’s less clear, however, how making products and services more expensive will help businesses.

Hype: 5
Business Impact: 7
Your Move: If the Cox/Wyden bill (your joke here) banning Internet taxes goes down to defeat –and it’s about fifty/fifty at this point — CFOs at companies with online operations will need to rethink earlier strategies intended to limit nexus. They’ll also need to figure how a five – seven percent levy on sales will affect short-term sales. Long-term, online customers will likely get used to the notion of virtual sales tax. Just how long long-term is… well, that’s anybody’s guess. Remember, it’s still nearly impossible to get Web surfers to pay for content on-line.

Let There be LEDs

CFOs who think they’ve maximized every technology investment their companies make should think again. While not, strictly speaking, a form of information technology, lighting does have an increasing technological aspect to it, particularly if it’s LEDs: light-emitting diodes. LEDs aren’t just for stereo systems anymore.

As the cost of the microchips that power each LED comes down, this form of lighting is being used for everything from flashlights and traffic signals to public-works projects including bridges, airport terminals, and the Jefferson Memorial in Washington, D.C.

A company called Polyink (a joint venture between Seiko Epson and Cambridge Display Technology of the United Kingdom) hopes to develop LED-based monitors that would be thinner and brighter than current LCD models, although analysts believe that any serious challenge to LCD displays is years away. In 2001, a company called Color Kinetics provided LEDs for the Mid-Hudson Bridge in New York State. Now the bridge’s IT manager can use a PDA to trigger the lights remotely.

That may not have much to do with lowering your lighting bill at HQ, but LED proponents say the technology will soon be a viable way to light almost anything. Some experts believe that because LEDs are computer-controlled, lighting systems for homes and offices will be able to be programmed to produce a range of effects beneficial to mental health.

Chart: How LEDs compare to conventional “necklace” lighting on the Mid-Hudson Bridge.

LED Conventional
Construction cost $460,000 $425,000
Cost at $.075 per kwhr $930 $4,650
Bulb replacement 22 years 2 years
Average life (hours) 100,000 10,000

Source: Color Kinetics


  • The trend towards outsourcing tech processes rolls merrily along. According to a new survey of IT executives conducted by AMR Research, the number of companies outsourcing applications management to offshore service providers will likely grow by 50 percent within the next twelve months. In fact, within the next year, AMR predicts that over a third of all corporate users will outsource some part of their IT function to cross-border locales. The type of work being shipped offshore? Mostly, applications development and applications management, says AMR.

Based on the study, worries about an IT job drain seem overblown. According to the U.S. Bureau of Labor Statistics, there are about 2.5 million tech support and software programming jobs in the U.S. right now. Offshore IT jobs account for less than 3 percent of the U.S. total. AMR’s projected increase in the number of companies using offshore resources will result in a mere 1 percent shift in the number of U.S. tech jobs headed overseas. What’s more, AMR also claims that more a third of U.S. corporates are currently planning to increase their IT budgets. That ratcheting-up should more than offset the exodus of programming jobs to offshore destinations.

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