• PC World
• » Tech Industry

I ran up plenty of bills shopping online this holiday season; I didn't miss the sales tax. That said, I don't want to lose speedy response times from my local fire and police departments, reasonably prompt repaving of my local roads (this century, please), and other local services.

Unrelated issues? No. Increased online spending by consumers has state and local governments worried that a significant drop in a major source of revenue--local sales taxes--will prevent them from delivering the services we all expect. And many government agencies are clamoring to end the ban on interstate Internet sales taxes that we've enjoyed for the past few years.

But taxing the Net will literally take an act of Congress. A 1992 U.S. Supreme Court ruling held that it would be too burdensome for businesses if states enforced sales taxes for out-of-state purchases. The 1998 Internet Tax Freedom Act put a three-year moratorium on Net access taxes (but not on sales taxes). And it created an advisory committee to study electronic commerce and recommend action on various issues, including online sales tax; the committee is due to give its final report April 21.

A Piece of the Pie

Here in the United States, we spent about $20 billion on cyberpurchases last year, according to Forrester Research, more than double the figure for 1998. Projections for the future vary, but nobody doubts that online spending will continue to grow--and state and local governments want a piece of the fiscal action.

Some states aren't waiting for Congress to act. Residents of Michigan and North Carolina are getting a surprise on their 1999 state income tax forms: a line asking them to calculate how much they spent online and pay the appropriate local sales tax. Florida and other states are mulling similar action. These states are merely applying existing laws that let them recoup sales tax revenue lost to out-of-state purchases. Such laws are common; the new twist is enforcing them with consumers. Businesses have paid the fees because it's easy for states to track their purchases; consumers are another matter. Now growing cybersales are prompting some states to try.

Have you kept all your online receipts? Probably not--and you have no incentive to do so. That's one reason this approach won't work very well and why Congress may ultimately have to intervene to get money to the states.

Proponents of Internet taxation argue that the Net is the same as any other sales channel and shouldn't be exempt from sales taxes. In fact, we do pay sales tax on some Internet purchases. Laws originally created to cover catalog sales require a business to collect the corresponding sales tax if it has a sufficient physical presence, or nexus, in a state.

Why Not Tax the Net?

Not surprisingly, many Internet businesses go to great lengths to avoid nexus status in high-sales tax states. That is one reason Amazon.com keeps many of its warehouses in Nevada (lower sales taxes), instead of California (up to 8.5 percent), where more of its customers reside. It's also a reason some brick-and-mortar franchises like Barnes and Noble create separate companies to do business online. Otherwise, with stores in virtually every state, Barnes and Noble would have had to process sales taxes on all its online transactions.

Some argue that not taxing Internet sales widens the digital divide. Because the wealthier Americans make more purchases online, does forgoing cybersales tax benefit most those who don't need the break? This won't be the case for long, argues economics professor Alan Auerbach of the University of California at Berkeley. If the wealthy already shop online, where's the growth market? The middle and lower economic classes, he says; so imposing taxes now would eventually affect everyone.

But sales taxes are often the most significant source of income for state and local governments. We all rely on local services, and we will all suffer if the regional governments are not able to meet their budgets, argue proponents of Internet sales taxes, such as Republican Governor Michael Leavitt of Utah, who serves on the U.S. Advisory Commission on Electronic Commerce.