TAXING ONLINE SALES

December 27, 1999
		Should the government tax purchases made on the Internet? Two experts discuss the growing debate between state governments and online merchants. Then read an Online Forum on the issue.

Forum: Taxing Internet sales Online Special: The New Internet Economy Dec. 25, 1998: Cybershopping. Sept. 7, 1998: Online entrepreneurs Sept. 7, 1998: Net profits Dec. 29, 1997: Virtual showroom July 1, 1997: Digital dollars June 11, 1997: Online privacy Browse the NewsHour's coverage of cyberspace and business.   Advisory Commission on Electronic Commerce National Tax Association	GWEN IFILL: Now to taxes and the Internet. Spencer Michels begins our report. SPENCER MICHELS: The holidays are traditionally the time of year when retailers nationwide make the bulk of their annual profits, but this year, an estimated $30 billion is being spent on the Internet, a small but growing portion of retail sales. Consumers are going online to buy books, toys, and jewelry. Anything that can be bought at a store can be bought via a computer. Consumers not only find it convenient, they can save money on taxes as well. When they purchase over the Internet, they are not charged a sales tax, as they are stores in most states. The Supreme Court ruled in 1992 that retailers do not have to collect sales taxes when they ship goods into states where they do not have a substantial "physical presence," like a store or a warehouse. But that could change. An intense debate has erupted over whether Internet purchases should be subject to the same sales taxes as goods bought traditionally in retail stores, taxes that vary widely from one jurisdiction to another. Last year, Congress approved a three-year moratorium against sales taxes that might be levied on Internet purchases, and there's legislation pending that would make the temporary ban permanent. However, the majority of the nation's governors and local state officials are for an Internet sales tax, fearful that they could lose up to $10 billion a year. Sales taxes are the single largest source of revenue for most state and local governments. In 1997, sales tax revenue accounted for $147 billion nationwide. As one would expect, traditional retail stores also are in favor of taxing Internet purchases. They argue a tax moratorium puts them at a competitive disadvantage. The debate over Internet taxes has crept into presidential politics. All the presidential candidates support the moratorium, but differ on whether there should be a permanent ban on sales taxes on Internet purchases. Only Democratic presidential candidate Bill Bradley has said he would not endorse such a permanent ban. Congress created an advisory commission to study the issue of Internet taxation. It is due to submit its recommendations in the spring.
	A discussion on Internet taxes
	GWEN IFILL: For more on Internet taxation we're joined by Governor William Janklow of South Dakota, who says Internet shopping should be taxed, and Bob Bowman, CEO of Outpost.com, an Internet-only retailer of consumer technology products. He says new taxes will hurt an emerging industry. Governor Janklow, let's start with you. What difference is it really for you between Internet sales and old-fashioned brick and mortar sales? GOV. WILLIAM JANKLOW, (R) South Dakota: Look, this is a matter of fundamental fairness. Why do we have taxes? And I think that's why we have to ask that question. We have taxes because we have to educate our kids. We have to take care of the elderly when they can't care for themselves. We have to care for the blind and the deaf and have police protection and fire protection and do the basic things that we all agree governments have to do. So the question is: Who's going to pay for this? And the announcer in the lead-in to coming on to me put this thing right into a nutshell beautifully. What he said was that you can take a situation where an emerging business can escape paying a tax that a traditional business has to pay. That's nonsense, and that's gobbledygook, and that's unfair competition to established people in business. GWEN IFILL: Mr. Bowman, what's the big difference for you? ROBERT BOWMAN, CEO, Outpost.com: Well, I think it's a little bit more complex than that. Equity and efficiency are the two hallmarks of any tax code. Equity means that if we're going to tax Internet, then we'd better tax cataloguers; it had better mean that bricks and mortars aren't getting any other unfair tax breaks, i.e., helping them invest and build their own stores in the states where they do have a nexus and taxes are already being levied. And efficiency means that these taxes can be collected evenly and equitably in the sense that there's voluntary compliance. I think Internet taxation by itself and only on Internet companies fails both those tests remarkably. GWEN IFILL: Governor Janklow, in your South Dakota budget for -- predicted for next year, you were counting on about $450 million -- $480 million in sales and use taxes. Do you have any way of telling from the season just past whether you're going to be taking a hit? GOV. WILLIAM JANKLOW: No. And let me tell you why. We all know we're taking a hit -- to whatever extent Internet sales take place in my state, we take a hit. But what you just listened to is really gobbledygook by that explanation. Let me tell you why. The fact of the matter is when you look at the taxation, all we're asking, all we're asking is that Internet sales be treated like catalogue sales. You know, who are these people that think somehow they have a right to go into business but they shouldn't pull their fair share of the wagon? They want the retired people and the handicapped people and those working stiffs out there driving trucks to pay their taxes and then they complain that it's not a level playing field. What they're doing is falling through a loophole that's going to make them a lot of money at the expense of working people.
	Whose money is it, anyway?
	GWEN IFILL: Bob Bowman, are you - is this gobbledygook? Are you robbing state governments of money they should be getting? ROBERT BOWMAN: Hardly. There is gobbledygook being espoused here, but I wouldn't say it's coming from me. I think that we're all willing to pay our fair share. But if we are going to use the tax right now, which in this state, Michigan, where I am today, they're going to try enforce, then everyone ought to have to pay it, everyone who orders from a catalogue and Internet. No one's arguing that it should be any more fair for us versus catalogue sales. No one's arguing it should be more fair for us than bricks and mortar. But are bricks and mortar people, are they getting investment tax credits? Are they being encouraged to build their store from states? Are states utilizing the tax code to encourage people to build their buildings there, and therefore creating an unfair playing field in their states? As soon as we eliminate that and create a truly level playing field, we say hallelujah, let's all pay taxes, make it fair. And I'm sure the governor agrees. GOV. WILLIAM JANKLOW: What taxes do you want to pay? Tell us what taxes, right now, you want to pay? ROBERT BOWMAN: I'm happy to pay any tax that everybody else is paying, Governor. GOV. WILLIAM JANKLOW: Is that through the Internet sales? GWEN IFILL: Governor, is it possible that the Internet is already taxed, just to get access to the Internet? GOV. WILLIAM JANKLOW: No, no, ma'am, taxing to get to the Internet is a different issue. I'm not in favor of increasing taxes or putting the burdens on that commerce. That's not the issue. Everybody agrees the Internet sales are exploding. So, there's no taxes out there now that are inhibiting the sales on the lines that you're using. What he and I are debating on whether or not when he sells a product to someone in my state that he should have to collect that sales tax from them just like Sears, and Kmart, and the grocery store does, and the clothing store does, and everybody else does. And in the software world this is a no-brainer to collect. What he's really telling you is, he wants to pay all taxes that he's entitled to pay, but the fact of the matter is he wants a zero-tax rate. He wants to have an unfair advantage. GWEN IFILL: Mr. Bowman, since the majority of people with household incomes over $75,000 a year have Internet access, the majority of people who earn less than $25,000 a year don't have a Internet access, is that a tax break only for the rich? ROBERT BOWMAN: In terms of the Internet sales? GWEN IFILL: Yes. ROBERT BOWMAN: Again, I don't want to... I want to make sure we eliminate the distinction here. Internet sales and catalogue sales are about the same. Catalogue sales do not pay taxes. There are use taxes that states can collect on cataloguers that some are and most are not, because it's a virtually impossible tax to enforce. And all we're saying is if we're going to tax the Internet, then let's tax the cataloguers, let's eliminate the tax breaks for everybody else. Sure, there's unfairness within the tax code as to somebody who makes $75,000 versus $25,000. I don't think the Internet's any worse than any other utilizer of a government system, though. And if there's unfairness, let's eliminate it. No one in the Internet world is saying let's not pay taxes. Let's not do this. We're just saying, let's make sure it's done fairly. And Governor, I would also urge that before we rush out and start levying taxes, this is still a young industry and we ought to see how it looks before we start to tax this animal. GOV. WILLIAM JANKLOW: We're not taxing the animal. We're taxing the sales to your customers. Your tax rate would be zero; all we're asking you to do is collect. And you better remember something; it's really the young people, the younger generation that understands how to use this technology; 70 year old people don't understand how to use this technology very well, and they're going to get stuck paying these taxes so you can give an unfair advantage to the people who fall through this loophole. GWEN IFILL: But Governor, how do you tax? How do you tax this? Every different jurisdiction has its own set of taxes; how do you do that? GOV. WILLIAM JANKLOW: Thanks for asking that question. Go ask Sears Roebuck; they're in 50 states and thousands of small communities. Go ask Wal-mart, they figured out how to do it. Go ask Kmart, they figured out how to do it. The fact of the matter is, in a technological world that we live in it's a no-brainer to ask the technology community to write the software that takes care of this kind of problem. And I'll also concede that if you can't write software that takes care of this problem for the companies, then they shouldn't have to collect the tax, because the key thing in this whole issue is we don't want to put a burden on them, we just want them to pay their fair share and not escape a reasonable tax that they have to collect. GWEN IFILL: Mr. Bowman? ROBERT BOWMAN: Well, first of all, let me defend 70 year olds, Governor. My mother just celebrated her 77th birthday, and she understands this just fine, thank you, sir. GOV. WILLIAM JANKLOW: God bless your mother, but the rest of the 70 year olds don't. ROBERT BOWMAN: God bless my mother and I think she's pretty typical. And maybe that just those of us here in the Midwest -- that hearty blood. But beyond turning it into a generational issue, we're all in favor of saying let's have equity. We're all in favor, if you think there's a software system that we can figure out the tax code for 40,000 different jurisdictions, then bring it on. I would only observe that this is a new industry, we don't fully understand it yet, we have cataloguers that have fought this long and hard for so many years now and in 1992 won -- won, in their words, maybe lost in your words -- the court case. And as long as we bring every body under the tent and treat everybody the same, then let's go forward from there. But to pick on the Internet versus the cataloguers, versus the bricks and mortars who get local tax breaks and state tax breaks just doesn't seem fair either. GOV. WILLIAM JANKLOW: You keep saying that, but let me ask you... you've got to understand something, sir, in my state, retailers don't get all kinds of breaks. We do things for economic development in South Dakota, but we don't have a corporate income tax, we don't have a personal income tax. We live on taxes like the sales tax and we don't give breaks to retailers to open businesses with tax breaks.
	Finding middle ground?
	GWEN IFILL: Is there any chance, any possibility of a middle ground between your two points of view? GOV. WILLIAM JANKLOW: Sure, look, we ought to be able to agree. I want them to be taxed just like catalogues are. If there's a nexus, they're taxed, if there's no nexus, they're not taxed. It doesn't take an act of Congress. Ma'am, we've got to understand, the state governments in this country have cut $25 billion worth of taxes in the last five years. It's the federal government and the President that don't know how to cut taxes for the American people. The states have stepped up to the plate. In my state, that has neither a personal, nor a corporate income tax, we have cut the property taxes in South Dakota, by the end of this next legislative session, 30 percent for every farmer, every rancher and every homeowner in South Dakota. That's phenomenal. GWEN IFILL: Mr. Bowman, excuse me, you get the final word. ROBERT BOWMAN: I would say there's always room for a compromise. Having spent ten years in state government, we'll always find the middle ground, but I think the Governor has just pointed out part of the problem. Every state is different, every locality is different, and therefore rush to judgment, we have a quick answer, let's take out the hacksaw - probably is not the best way to go. We all agree, let's have equity, let's move forward with that in mind and I think we'll achieve the goal. It may not happen in six months, it may not happen in 12 months, but we'll get forward and we'll all be treated equally I'm quite sure. GWEN IFILL: Lively discussion, Bill Janklow and Bob Bowman. Thank you both very much. ROBERT BOWMAN: Thank you. GOV. WILLIAM JANKLOW: Thank you, Gwen.

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