A Tax-Free Net Forever? Not So Fast

Read their lips--no Net taxes, at least not for a few years, if any one of three bills winding their way through Congress becomes law.

No Special Tariffs

The bills--one proposed by Rep. Christopher Cox (R-Calif.), another by Sen. Ron Wyden (D-Ore.), and a third by Sens. Judd Gregg (R-N.H.) and Joe Lieberman (D-Conn.)--would all temporarily ban special tariffs on Internet access fees or bandwidth use. But temporarily is the key word: This is a moratorium, not a permanent ban. All three bills acknowledge that taxing the Net is inevitable. The question is how.

The three bills differ in their particulars. The Wyden bill calls for a six-year moratorium, twice what the others seek. Each bill calls for a policy body to study the Net tax issue during the moratorium, but they differ on how these bodies should be composed and what their goal should be (see the chart "Internet Tax Bills: Comparison," link to right).

The bills have one important common denominator: None specifically bans sales taxes on Internet transactions. And sales taxes--on all remote sales, including mail-order, catalog, and Internet transactions--are what these bills are ultimately all about.

"Electronic commerce triggered the debate, but it's not about electronic commerce," says Charles McLure, a senior fellow at the Hoover Institution in Palo Alto, California. "If our sales tax [system] made sense, we wouldn't be having this conversation."

Lost Revenue

What doesn't make sense is this: As tax laws stand now, if a merchant sells to a customer residing in a state where that merchant has a physical presence, that merchant must collect sales tax--whether the sale occurs across a counter, by mail, or over the Net. In the latter two cases, those taxes are rarely paid, because of the difficulty of tracking remote sales.

The National Governors Association estimates that $4 billion of potential sales tax revenue is lost each year on the $100 billion spent for mail-order purchases. In only a matter of years, Internet commerce could represent an additional revenue loss of as much as $12 billion. Local officials would like to collect sales taxes from nonlocal merchants for sales to residents in their jurisdictions--which is why those officials support the Cox bill and its call for a national system designed to collect taxes on remote sales.

"It is vital that the Internet thrive," says Colorado Gov. Ray Romer. "But it is also vital that states have sales and use taxes that are fair to businesses of all kinds, whether they operate on Main Street, through catalogs, or electronically," he adds.

Old-Fashioned Hardball

How do vendors feel? "The [retail] industry isn't saying, 'We want to be tax exempt'," says Kent Johnson, national partner for KPMG Peat Marwick, which recently surveyed Internet-based businesses on the issue. "Most of them would love to have a clear, equitable, nondiscriminatory system in all the states. Most important, they want the compliance side of it to be very easy."

The Wyden bill has already passed the Senate Commerce Committee and is expected to face a floor vote as early as May; the Gregg/Lieberman bill could be attached as an amendment. And the Cox bill might come up for a House vote even before May.

Almost everyone involved agrees on the need to standardize taxes on Net transactions. But that has become much more difficult now that the issue covers all remote sales. So while the focus is on futuristic commerce, what looms ahead is an old-fashioned game of hardball.