To tax, or not to tax?
Boston Business Journal - by Sue Robinson Special To The Journal
The biggest question right now consuming online retailers--or "e-tailers"--seems to center on Internet taxation, and many involved in electronic commerce in New England are paying close attention to the talk at the federal level about the issue.
"Obviously, whatever is decided is going to have a huge impact on businesses like us," said Emily Low, the content manager for New Hampshire-based Kitchen Etc.'s web site, which calls itself the largest e-kitchen on the World Wide Web right now.
Currently, customers of the company's web site, kitchenetc.com, pay sales tax only if they are buying from Massachusetts, Rhode Island, Connecticut and Virginia, the sales-taxed states where Kitchen Etc. maintains stores.
"And, since our customers already have to pay shipping costs, adding a tax on top of that hurts. So, if we could have a little bit of an edge, then it would certainly improve the number of people willing to buy online, and that is going to help the overall global economy in general," Low said.
The issue loomed even before online holiday sales began garnering a good chunk of the overall seasonal revenue and customers began getting more and more comfortable clicking a mouse to buy products. Internet sales ring in at about $200 billion in the United States, a number expected to soar to some $1.5 trillion in four years, according to various industry studies.
Right now, a company with a physical presence in Massachusetts, California and Maine, for example, only has to charge a sales tax for web customers buying in those three states; other customers, say from Connecticut, don't get the sales tax included in their credit card payment with the company, but they are subject to a use tax by their home state. However, the use tax, which shows up as a line on state tax forms, is rarely collected.
Sounds simple, right?
Unfortunately, a number of questions arise as to what constitutes a physical presence in e-commerce. If an e-tailer has some sort of a service provider in Connecticut, does that mean that that company has a physical presence there and therefore must tack a tax onto its bill to Connecticut residents?
Other issues include what happens when you sell globally, and who bears responsibility for enforcing the home-state taxes for customers buying from a company without a presence in the home state.
"And then you get even more complicated when you talk not only about the jurisdictional issues, but also when you discuss that part of the economy where the products are not only ordered over the Internet, but actually delivered over the Internet as well," said Karl A. Frieden, author of the book "Cybertaxation: The Taxation of E-commerce," and a partner in the Boston office of Arthur Andersen LLP, which consults on e-commerce tax issues.
The law is generally tailored toward the sale of tangible products and does not adequately address the sale of products such as software, information and music that can be transferred digitally to the consumer, he added.
The definitive solution rests with the federal domain, in no small part because of the 7,500 separate jurisdictions across the nation that each have their own tax rates and rules. To address the issue in the short term, Congress enacted the Internet Tax Freedom Act in October 1998, which put a three-year moratorium on all Internet taxes except for those taxes already being enforced.
The federal legislation also created a 19-member committee, the Advisory Commission on Electronic Commerce (ACEC), made up of governors, tech company CEOs and other political and business leaders from across the nation. The commission has until April to formulate a proposal to deal with the issue. Among the more popular suggestions on the table are:
• No taxation for any Internet purchases--a proposal supported by online retailers, but opposed by those in government and traditional retail industries who see it offering an unfair advantage to their e-tailing competition;
• A flat federal tax across the nation, a proposal that raises the issues of where the money goes and who would collect it;
• State taxes for purchases within the state but on a much more simplified system than what exists now.
Currently, there is little local e-tailers can do but wait and lobby politicians for their own preferences. And even e-tailers themselves cannot agree on one right way.
"Obviously, it would be good if the electronic commerce had a tax holiday to help promote online shopping during specific seasons, but if there is going to be a tax, it would be much preferred to have a uniform national sales tax, as opposed to a state-by-state tax," said Michael Barach, president and CEO of MotherNature.com in Concord. "It would put everyone in the same boat, and it would make it much less complicated.
"I think that the worst thing that could happen is that the legislation lapses in another year-and-a-half and nothing takes place," he continued, "because then you will have chaos."
Tom Hopcroft, president of the Massachusetts Electronic Commerce Association in Boston, said something needs to be done, as the status quo is unfair to small and medium-sized e-commerce companies that do not have the manpower to investigate the ins and outs of Internet taxation.
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