E-COMMERCE: The Untapped Revenue Stream?

Anyone with a computer and a modem has unlimited access to information and merchandise on the Internet.  While the virtues of the Internet are being sung around the world, US lawmakers are struggling with several potential Internet hazards.  This article explores the question:  Should Internet consumers have to pay sales tax for online purchases?

States have always been allowed to collect sales tax from companies having a physical presence in the respective state.  A straightforward situation is one in which the seller and customer are in the same state.  The seller collects sales tax from the customer and remits the tax to the state.  Of the 45 states who have a sales tax, about a third of their revenues (roughly $156 billion in 1998) are generated from sales taxes.

When the seller is in a different state than the customer, the situation becomes more complex.  If the seller has a substantial physical presence in the state of the customer, then the state can require the seller to collect the state's sales tax.  Otherwise, the customer may be required to self accrue and remit a "use tax" to the state.

So, what constitutes a substantial physical presence?

Enter The Internet

Some states question whether a Web site hosted on a server creates a physical presence in the state where the server resides.  The situation is even more difficult when multiple states are involved.

Suppose a customer in Texas logs onto the Web site of a Minnesota company, whose server is in Illinois and whose warehouse, from which the product is being shipped, is in Arkansas.  Which state has the right to claim the sales tax?

The answer could lead to a single Internet transaction being subject to taxation in multiple jurisdictions.  As the volume of Web transactions continues to soar, state and local jurisdictions are determined to get their piece of the tax pie.

IFTA Enacted

In 1998, the number of Internet users and the number of Web pages doubled every 100 days.  Because of the issues created by this tremendous growth, Congress enacted The Internet Tax Freedom Act (IFTA).

This Act was based on a simple principle:  information should not be taxed.  IFTA has placed a 3-year moratorium on any new taxes on Internet access fees, although a "grandfather" clause permits states that were previously taxing Internet access to continue to do so.

Because Congress saw that the Internet was susceptible to multiple state taxation in ways that traditional commerce were not, the moratorium also restricts multiple jurisdictions from trying to creatively tax the same transaction.  The restriction does not prevent one state, generally the state where the purchased item is used, from taxing the purchase.

IFTA also calls for a special 19-member commission (Advisory Commission on Electronic Commerce) to study questions and proposals regarding remote sales on the Internet.

The commission has solicited public proposals to address the e-commerce tax issues.  Some proposals want to simplify existing state and local sales and use tax requirements that apply to e-commerce, as well as sales and use tax in general.  Other proposals would remove any financial and administrative burdens placed upon the seller for complying with the collection of sales and use tax.  Proposals for reducing such burdens range from states imposing a single flat state rate with no local tax rates on e-commerce to abolishing sales tax altogether on Internet purchases.

The commission is also pushing Congress to extend the IFTA moratorium (due to expire on September 30, 2001) for up to 5 more years as agreement on this issue is,  indeed, elusive.

E-Stores - An Unfair Advantage?

The proposals raise as many questions as answers.  Should all sales be taxed equally, whether on the Internet or over-the-counter?  Should a tax haven be created for e-commerce?  Economist Austan Goolsbee of the University of Chicago estimates that if people had to pay sales taxes, e-commerce might be 30% lower.  If Internet stores don't have to charge sales tax, aren't brick and mortar stores placed at a competitive disadvantage?  Is e-commerce trade receiving a tax benefit that really isn't needed for continued growth?

If Internet sales continue to explode, states fear that untaxed online sales will drain their tax coffers to the extent that higher property taxes, income taxes, and sales tax rates will be necessary to recoup lost tax revenue.  Call us if you have concerns about sales and use tax issues.

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CAMPAIGN 2000 AND THE ISSUE OF TAXES

Tax changes are near the forefront of most election campaigns, and this year is no different.  How do the presidential candidates want to handle your tax situation?  This article spells out the candidates' plans.

Republican Candidate

Governor George W. Bush's tax proposals represent an aggressive approach to tax relief.  The Bush plan calls for a 5-year across-the-board tax cut of $483 billion, and a new tax-rate structure to replace the current 15%, 28%, 31%, 36%, and 39.6% rates.  Bush will instead construct a lower rate schedule of 10%, 15%, 25%, and 33%.

Bush aims to reduce the marriage penalty by restoring the deduction for two-earner families.  In addition, he would raise the phase-out of the child credit to $200,000 for both singles and couples.  Bush also wants to eliminate the estate tax over 8 years.

To promote charitable contributions, the Bush plan makes all contributions eligible for deduction, regardless of whether a taxpayer itemizes.  Further, Bush would make certain donations from IRAs penalty free.  Finally, the cap on corporate charitable contributions would be raised from 10% to 15% of taxable income.

Bush also proposes to repeal the social security earnings test for senior citizens and expand Education Savings Accounts.

Social security is an important point in Bush's campaign; therefore, he promises not to rely upon any social security surplus to finance the new tax plan.

Democratic Candidate

Vice-President Al Gore has proposed a more moderate approach to tax relief than Governor Bush.  Except for some modest cuts, the majority of Gore's plan focuses on protecting the recent budget surplus.

Gore's plan includes a new provision in the tax code--he wants to create 401(j) Accounts.  These accounts, titled "Life-Long Learning Accounts," would allow an annual $2,500 contribution, which could be made by families and employers.  A tax credit equal to 50% of the contribution would also be included.  The earnings could be withdrawn tax-free if used for education or qualified "life-long" learning.

Gore's plan also calls for a reduction of the "marriage penalty" by increasing the standard deduction for married couples filing jointly.

Finally, Gore proposes to create "Universal Savings Accounts," to promote savings in the economy and provide a means for lower income families to participate in a savings plan.

While Governor Bush promises tax savings, Vice President Gore promises caution.  But, history shows that the chances of those campaign promises ever being kept are only 60 to 70%.  American University professor Jeff Fishel reports that in the presidential terms between J. F. Kennedy and Ronald Reagan, an average of 60% of campaign promises were kept.

Going back to 1944, Rutgers University professor Gerald Pomper found that elected presidents have made strong efforts to fulfill close to 70% of their platforms.

Will Campaign 2000 promises prove to be different?  We'll keep you informed.