It Don’t Come Easy

Will E-commerce companies get to keep their tax breaks?
Joseph RadiganDecember 1, 2000

Attendees at The Conference Board’s Second Annual Conference on Advanced Tax Strategy for E-Commerce might have thought they’d found a haven from the tumult over the Presidential recount in Florida, and the drama of the dimpled ballots, when they arrived in New York this week to attend the conference.

That sense of relief might have even been reinforced when the scheduled keynote speaker, Rep. Christopher Cox (R-CA), had to cancel at the last minute. After all, no pols on the podium, no politics on the agenda. Right?

Not exactly.

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Karen Myers, a tax lobbyist in Electronic Data Systems’ Washington, D.C., office pinch hit for Cox, and drew a bleak picture for any attendees that might have thought they could forget about the Florida recount, if only briefly. First and foremost, the lesson of this post-election season is that bipartisanship is on its deathbed, and that’s going to complicate any efforts to simplify the business tax code as it applies to E- commerce.

“I can’t recall a time when Washington has been as divided, and this has significant implications for tax policy,” Myers said. It doesn’t help that with the presidential vote being a virtual tie, the new president, whether it is Texas Gov. George Bush or Vice President Al Gore, will have trouble laying claim to a mandate for bold new legislation.

That is compounded by two other factors that will make it hard to enact legislation on E- commerce initiatives. One is that any E- commerce tax bill will have to pass through at least three committees in both houses of Congress. While that has always been the case, the lack of a solid majority by either party in both houses will make the legislative process especially arduous this term.

In addition, the absence of a crisis means that members of Congress can afford to drag their feet. There’s no special incentive for them to work toward a compromise.

Still, Myers said a general consensus exists to simplify the tax code as it applies to E- commerce. For example, the U.S. alone has more than 30,000 tax jurisdictions spread among the 50 states. A company or organization that does business on the Web has a legal obligation to collect taxes in every jurisdiction where it does business. The complexity poses an especially large burden for smaller firms that lack sophisticated accounting systems.

While the Supreme Court has ruled that the complexity of the different sales taxes codes relieves a business from the obligation of collecting sales taxes in jurisdictions where it lacks a physical presence, the Court has also held that if the states simplify their tax codes to Congress’ satisfaction, businesses will ultimately have to start collecting sales taxes in those states.

The Streamlined Sales Tax Project, which includes tax officials from 26 states has already met seven times this year, most recently this week in Chicago.

Myers does expect some progress to be made on other fronts. She expects that the moratorium on E-commerce taxes will be extended beyond next year. In addition, Congress is also likely to extend the moratorium on sales taxes of Internet access. That moratorium exists primarily because most Internet subscribers are already paying federal taxes on the phone line they need for their online access.

One of the wild cards in the political arena concerns “nexus,” the legal term for a physical presence. Currently, merchants are only obligated to pay sales or use taxes in jurisdictions where they have nexus. But given the nature of the Internet, tax authorities, both in the U.S. and overseas, are looking to redefine nexus.

Stephanie Lipinski Galland, director of external tax relations for Gap Inc., who followed Myers on the agenda, said nexus is merely one of several complicated issues confronting corporate tax officers.

First off, Galland said tax officers have to supervise Web designers closely to make sure that E-commerce sites are designed with the necessary warranty and tax lien information.

In addition, something as simple as shipping costs presents corporate tax officers with a hornet’s nest of problems. For example, shipping and handling costs are subject to sales tax in most states, but shipping costs, if they are assessed alone, are tax exempt. If the text on a Web site itemizes only the shipping costs, but the merchant essentially absorbs the handling costs without providing the detailed amount, the merchant could find itself in trouble with its auditors.

Corporate tax officers also have to consider a company’s return policies for goods purchased through their Web sites. In Gap’s case, since it allows returns to be made at its stores, it assesses a use tax, which serves as a substitute for a sales tax in many states.

Ultimately, Galland advised attendees to work through as many of these issues in advance and not wait for the auditors to question every single aspect of their business.

Unfortunately, there are no easy answers, and financial professionals may have to wait an eternity before the tax code actually makes some sense of E-commerce.

Martin McClintock, Deloitte & Touche’s global director of E-business] tax services, told that there are simply too many constituencies with competing interests that have a stake in E-commerce tax policy. That’s not to say that compromise is out of the question. But a lot of groups will have to be satisfied that their interests are not being overlooked before a compromise can be reached.

For one thing, the individual states want to protect their finances and will lobby heavily against any laws that put Internet firms beyond the reach of their taxmen. For another, traditional mom-and-pop and mid-size retailers view pure E-commerce competitors as threats to their survival, and they resent what they see as favoritism in the moratorium on Internet taxes.

That said, no politician wants to be viewed as an obstacle to the growth of E-commerce.

“It’s a potholed road that walks down all of the precedents of case law,” McClintock said. Until the rise of E-commerce, mail order merchants were generally exempt from state and local taxes. Internet retailers would like to gain the exemption permanently, and while they’ve gotten it on a temporary basis, it’s far from certain whether the new Congress will make the exemption permanent.

“One side of the argument says there is enormous tax revenue at risk here,” McClintock noted. “But states are running huge surpluses right now, so that argument doesn’t have a lot of weight.”

“There’s no real body of legal precedent applying to the online world,” he added. “It’s all about the business models that are changing faster than we can keep up with.”

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