The Taxman Cometh to Online

Opinion: All signs are pointing to the end of a tax-free Internet.

Selling online? Think you may never have to charge a sales tax?

Think again.

State governments, tired of seeing an estimated $15 billion in revenue go uncollected, are organizing themselves. And that doesnt bode well for companies selling goods over the Internet.

The latest salvo came last week when the Council of State Taxation (also known as COST, cute, no?), state legislators and some retailers agreed on the outlines of a plan they hope will start them on the path to collecting sales taxes on online transactions.

The idea is to make collecting sales tax easy. Once its made easier then, COST and its allies argue, online retailers will have less objection to collecting taxes from their customers. Making that argument a bit more powerful is the fact that sales tax advocates are no longer up against a nascent technology. With celebrating its 10th year in business many think that the idea of collecting taxes on stuff sold over the Internet is one whose time appears to be dawning.

Why has time run out? Well, the money moving around online has gotten too big. And state governments—strapped for cash—are looking for help paying their bills. With more than $60 billion in sales taking place on the Net, its no wonder theyre looking online. In some respects, theyre just joining the crowd.

Or as The New York Times opined on Monday: "Thirteen years is a long time to get a pass."

The New York Times doesnt set policy, of course. But its editorials can set a tone—one that gives politicians cover for their decisions.

This is an issue in which states will be able to present Congress with some familiar but cold facts: Recent cuts in federal income taxes for individuals and corporations have reduced the amount of money the federal government is able to give states and local government. Theyre on their own when it comes to finding money. And since Congress wont get the blame—if theres any to go around—theyre going to be happy to give the states the power to tax. Its very easy to envision a scenario where Congress pats itself on the back for allowing states to tax one of the few places where revenue is increasing: the sale of goods over the Internet.

The entire argument gets easier for brick-and-mortar retailers to make if multistate agreements like the one crafted last week are put in place. An easy-to-understand tax collection system makes it hard for businesses, particularly those that depend on software that can make tax collection even easier, to fight. Whats more, COSTs arguments about fairness—why are their members forced to negotiate the sales tax provisions of 50 states while truly ubiquitous online retailers have no such obligation?—could go a long way toward persuading Congress to be "fair."

In addition, online sale tax opponents recently lost a powerful proponent.

Rep. Chris Cox, long a proponent of keeping the Internet free from sales tax, has left Congress to run the Securities and Exchange Commission. Cox introduced two bills that ban sales tax for online sales earlier this year, but hes not going to be around to move this issue forward. Thats bad if youre an online retailer, good if youre a state controller.

Now this is not the sort of legislation that passes by itself as a stand-alone bill, so the fight here is going to be mostly in the backrooms and side hallways of congressional office buildings. So look for wording to allow tax of goods sold online to be slipped into larger and longer tax, appropriations or authorization bills as Congress hurries to do its end-of-year work. Or the sales tax wording will be part of an amendment to a telecommunications law, expected to get congressional attention next year.

Without an influential politician like Cox—notable for his dislike of taxes and his interest in high-tech—to stop such amendments from winning approval, online retailers have a tougher fight on their hands—on a number of fronts—than they did the last time this issue came up.

And, like many of the other fights being waged in Congress—copyright law is one—the battle over online taxation marks the Internets coming of age. Its an established technology now that is giving birth to new businesses all the time. And real businesses pay real taxes. 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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