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Net Sales Tax Need, Payoff Questioned
>> By Charles Farrar
 March 18, 2003
WASHINGTON -
According to a study issued March 13, reports that an untaxed Internet
equals potentially large losses in state tax revenues are exaggerated,
and taxes that are levied in the future against e-tailers will not
translate into the big payoffs that are anticipated by those states
that favor cybertaxes.
According to the Direct Marketing
Association (DMA), which authored the study, it's that exaggeration
that was used to create a political crisis rather than solve a
legitimate economic problem. "If states claim there is a policy
emergency arising from the growth of e-commerce, the best available
growth rate numbers show a very different picture," says the Direct
Marketing Association. "If there is a leak to state treasuries at all,
it is growing only incrementally."
"I would say yes," said Eric
J. White, chief executive officer of Pennsylvania-based
VirtualSexMachine.com, when asked if he thinks the states exaggerate
the extent to which Internet sales drain away potential state tax
revenues. "If anybody pushes the idea in front of me, they're sure not
going to get my vote."
The DMA produced the study with a number
of online, offline, and catalog companies. The study says that the
states may have overstated by 85 percent the actual uncollected sales
tax revenues they stood to face by way of e-commerce.
"For
example, in 2001, the states reported that approximately $13 billion
went uncollected due to their inability to force out-of-state retailers
to act as their unpaid tax collectors," the DMA said in a statement
given with the study's release. "In fact, the total amount potentially
uncollected was about $1.9 billion." The group also said that
widely-cited studies from the University of Tennessee "erroneously
relied" on information gathered during the Internet boom, "and made
flawed assumptions about e-commerce that resulted in their vast
over-estimates."
Those included a failure to distinguish
business-to-business Net activity from pre-existing
business-to-business commerce, the DMA continued, as well as
excessively low rate-of-business compliance on remitting sales taxes,
and failing to record a fall in so-called "pure-play" e-tail in favor
of "bricks and clicks. All of these factors resulted in excessively
high estimates of how much the states were losing financially from
Internet sales."
The Tennessee study is sometimes thought to
have had a political impetus of its own – it was commissioned by a
think tank called the Institute for State Studies, whose founder is
Utah Governor Michael Leavitt, one of the nation's most outspoken
advocates of Internet sales taxes. A few years ago, Leavitt made his
reputation as a key leader of the e-tax coalition within the National
Governors' Association, when that group began studying the Internet tax
issue seriously.
Last November, a group of tax officials and
lawmakers from thirty states, including the District of Columbia,
signed onto a voluntary deal to collect sales taxes on e-tail
purchases. The latest legislative move on Net taxes came March 12, when
New York's Republican-led state Senate passed a bill that would give
the state the power to collect e-tail taxes. That bill has a resistor
in New York's top Republican, Gov. George Pataki…so far.
The
U.S. Supreme Court has ruled that no state can force any business to
collect sales taxes for that state unless the business has an actual,
physical presence within the state, and there remains a federal
moratorium on Internet-only taxes through November 2003.
DMA
president H. Robert Wientzen said that Congress shouldn't even think
about "overturning the long and successful history of the Interstate
Commerce Clause" without looking at the entire picture. "The analysis
of Internet economic activity in America that we released today
demonstrates without a doubt that there is - despite what a lot of
state politicians are claiming - no pot of gold for the states in
creating new burdens for remote retailers," he said in a statement.
Wientzen
said the state budget deficit issue is real enough but federal
lawmakers shouldn't be duped into thinking that the Internet is to
blame. "(T)he last time the states came knocking on Congress' door
asking for the power to force out-of-state businesses to collect
states' sales taxes, most of them were running record surpluses," he
said. "Furthermore, the so-called simplification proposal that the
states have been trying to pass - in the hopes of winning Congressional
support - is anything but simple."
Forrester Research has said 2002 Internet sales swelled to about $80 billion, accounting for three percent of all retail sales.
But
Wientzen said the real issue is whether the states can achieve
meaningful tax simplification and fiscal control. And he also
questioned why they might still be pushing for federal Internet sales
tax legislation, since the states can tax without Congress's say-so.
"What the states now are seeking in Congress will lead to burdensome
costs and administrative complications that, ultimately, will be
shouldered by consumers at a time when the economy can least afford
them," he said in his statement.
One of those burdens includes
yet-to-be-developed software needed by "almost every business in
America to manage its cumbersome obligations to 7,600 taxing
jurisdictions," software that could cost as much as $25,000 a license
and $60,000 a setup, Wientzen added.
According to White, that
kind of new e-tax management and compliance burden would be
"unmanageable, a nightmare. Oh, my God, multiply it times fifty. And
that's just the state taxes, forget the local taxes. Here in
Pennsylvania, we have Philadelphia, and Bucks County has some kind of
(sales tax) deal down there. The state alone has a six percent sales
tax."
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