Internet Tax Debate Gets Stickier

Opinion: A flood of reader e-mail prompts another look at the struggle over imposing taxes on Internet sales.

Think its easy writing columns on tax policy?

Think again.

Which is what I should have done before I wrote last weeks column on Internet sales tax.

Boy, am I popular. Readers wrote in—some quite angrily—to say (inaccurately) that I must not have many dealings with state governments and that they hoped Id have to endure the same torture they did when it came to dealing with the tax man.

Others wrote to tell me that Congress has no business telling the states what to do and that businesses dont pay taxes, customers do. Others warned that sales taxes would make buyers go overseas for their goods.

Well get to all of those in a minute. And theres more to add about the tax debate, which could heat up in earnest later this year. But first, a correction. I said last week that former U.S. Rep. Chris Cox had introduced legislation to keep the Internet tax-free.

I was looking at a piece of legislation out of context, and I made the sort of boneheaded mistake that I often criticize others for making: I assumed something. Coxs bill doesnt have anything to do with sales tax; it is instead a ban on telecom taxes.

Before the states can impose sales taxes on goods purchased at businesses that are not physically located in their jurisdictions, Congress must to pass a law to reverse a Supreme Court ruling that linked the right to collect taxes to physical location.

Having said that, let me repeat the basic message of last weeks column. The incentive to impose sales tax on goods sold over the Internet is a powerful one that will play well in Congress. All of the forces at work, particularly the need for states to find new ways to raise money to make up for cuts in federal support and funding, are going to make it politically palatable for Congress to pass legislation that allows the states to enact such taxes.

Congress wont be raising taxes; the states will. And the states wont be taxing their residents—not directly—because the money will be collected by out-of-state retailers. In other words, theres plenty of wiggle room and way too much money at stake.

Which brings up one readers comment that the $15 billion in estimated revenue doesnt really jibe with another estimate that $60 billion in sales are conducted each year over the Net. Those figures seem exaggerated, no?

Yes, they probably are exaggerated. But hey, this is politics, not math class. Just the indication of the perceived windfall—and thats how many state governments are going to see the potential to tax sales on the Internet—is enough to get things going in what, for many readers, is clearly the wrong direction.

And yes, while its possible that many shoppers will go online and buy outside the United States if a sales tax is imposed, its unlikely. Buying overseas—dont forget shipping and customs duties—isnt quite the same as driving to New Hampshire or Delaware from New York or Maryland.

The shop-overseas idea gives you some sense of the indignation thats out there. But lets put that aside, shall we? Yes, small businesses have an unfair burden. But, well, thats really what this discussion is about, isnt it?

The idea that online businesses may have to pay and collect sales tax is part of the maturation of businesses online. Its a political reality that some are facing. Thats why theres some real live, honest-to-God strategizing going on.

Worried that its small sellers will be put out of business by the imposition of state sales taxes, eBay is pushing for an exemption for those small businesses.

Amazon says it already collects sales taxes where it is required to do so and that it wont oppose a state sales tax as long as the process of collecting those taxes is easy to manage.

These are clever extensions of the entrepreneurial argument that has had some success in Congress, and both stand a chance of working, particularly if eBay is able to mobilize its sellers to call their elected officials.

Amazon is smart to use a variation on the tax "simplification" argument. With that approach, the online retailer gets the best of both worlds: a tax system it might be able to easily manage and a few points for political insight.

Why insight? Well, "simplification" is one of the more popular phrases being used by President Bushs Advisory Panel on Tax Reform, which is scheduled to make its recommendations to Secretary of the Treasury John Snow later this year, probably in September.

Made up of political moderates, the group is working on a report that will provide Congress and the White House—not to mention Internet sales tax advocates and opponents—with a series of solid recommendations.

As those recommendations head toward enactment, online sellers and their customers will have plenty of opportunity to make their feelings known. Whos going to win? Well, my money is still on the states being able to collect taxes. But, as we all now know, Ive been wrong before. technology and politics columnist Chris Nolan spent years chronicling the excesses of the dot-com era with incisive analysis leavened with a dash of humor. Before that, she covered politics and technology in D.C. You can read her musings on politics and technology every day in her Politics from Left to Right Weblog. She can be reached at


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