Global Network, Local Sales Tax?A group of county officials want to introduce an idea to cyberspace that at first blush seems at odds with the borderless Internet. The proposal: a local sales tax.
Randy Johnson, chair of the Hennepin County, MN, Board of Commissioners and president-elect of the National Association of Counties, says fairness dictates that an online software purchase should be taxed just like one completed at the local CompUSA.
"You should not be able to avoid state and local taxation by working under the guise that you don't do business in a particular state," Johnson said. "Just because it goes over a computer net doesn't mean it should be placed in a separate category."
Johnson is the first to admit, though, that enforcing local sales tax on the Internet will be difficult, beginning with problem of determining which locality a sale has occurred. Johnson argues that taxes should be collected at the "point of purchase," or where the user is sitting, when an online sale is made.
Even determining how to tax information and determining that a sale has occurred will pose problems to local and state officials, Johnson said.
"Enforcement is a difficult part of that," Johnson admitted, "but I don't think that that's a good reason to drive public policy to say ‘oops, we're going to exempt all of these transactions that if they were not on the Internet would be subject to taxation.'"
Furthermore, technical problems may prove too difficult to overcome, but let local and state governments – not the federal government -- determine when that level is reached, Johnson said.
Keith Fox of the Internet Shopping Network, a San Francisco-based company that accounted for $11 million in online sales in 1996, said, though, that ISN already collects state sales tax. He said ISN does not view that as too burdensome.
"It's not the ideal situation, but we are very capabale of handling taxation on the state level. And we probably could handle it at the local level," Fox said. "It probably – from the stand point of administration -- wasn't a huge cost."
Fox said ISN uses codes to label which state a purchaser is located in. Including local sales tax would simply mean more codes.
Maintaining the list of codes could be a burden for Internet retailers, Fox said, but local sales taxes might be less of a burden if a third party maintained a uniform list of codes.
Sen. Ron Wyden (D-OR) and Rep. Christopher Cox (R-CA), however, have introduced legislation that would put a moratorium on any state or local sales tax. Dubbed "The Internet Tax Freedom Act," the bill would prevent states and localities imposing sales taxes in cyberspace.
The moratorium will provide time for states to create an efficient way to impose sale taxes, the bill's sponsors say.
"My concern is that the extraordinary promise of the Internet could lose some of its luster if you see a significant number of the country's 30,000 taxing jurisdictions imposing new local levies and taxes that aren't technologically neutral on electronic commerce on the net," Sen. Wyden said.
Wyden and Cox's bill, the authors say, is meant to provide a "time-out period" to allow uniform taxation laws to be developed for the Internet.
But the senator rejects the idea that state and local governments would have the right to impose sales taxes even if his legislation fails.
"If you looks at the states' history, there has been state's authority to levy taxes when there has been some sort of physical presence in the state," he said. "You don't see that with the Internet. Data doesn't move in that way."
Wyden said he was confident that the legislation will pass, noting the bipartisan support for the bill in the Senate Commerce Committee. However, the act has been held up in the Committee in order to gain wider consensus. Hearings on the House version are scheduled for July.
Along with The National Association of Counties, the act has been criticized by the National Association of Governors, and the U.S. Conference of Mayors have argued that Wyden and Cox's legislation unfairly restricts local governments. Two senators on the Commerce committee also voiced that concern during their meetings.
"I don't necessarily feel that Internet taxation is a good thing, but I'm not sure we need federal preemption," said Solveig Bernstein, Associate director of telecommunications and technology studies at The Cato Institute, a Washington-based libertarian think tank. "It might be better for states to learn this by themselves."
The Act, though, has strong backing from businesses doing business on the Internet, including IBM and AT&T, which supports the idea of Internet tax moratorium to allow national standards to emerge.
"The taxation of online transactions as an issue has not been thoroughly thought through," Jody Olmer director of domestic policy for the U.S. Chamber of Commerce, said, "and we think the ramification of random taxation could hamper businesses on the Internet."
In an interview with the Online NewsHour, Ira Magaziner, President Clinton's chief Internet policy advisor who headed the drafting of "A Framework for Global Internet Commerce," said the final draft of the framework the administration would call for states and local governments to develop a uniform system of taxation through their national organizations which is "uniform, simple and transparent and involves no new Internet-specific taxes."
"What we are concerned about is a number of states and localities have begun to develop different methods of taxation which would require an army of accountants for companies wanting to do business to be able to sort out," Magaziner said.
If the local governments can't develop a workable system, Magaziner said, the administration would support federal legislation on the subject.