Internet sales tax eyed again

By Kerry Fehr-Snyder

July 17, 2000 Web posted at: 11:21 AM EDT (1521 GMT)

In this story: The rules of e-commerce How much lost revenue? RELATED STORIES

PHOENIX, Arizona (The Arizona Republic Online) -- With proposals on the Nov. 7 ballot to eliminate Arizona's personal income tax and rely even more on sales taxes for education, politicians and others are eyeing electronic commerce to pick up the slack.

Taxes on Internet sales in Arizona alone could eventually top half a billion dollars annually.

Last week, Gov. Jane Hull told reporters, "I believe that after the election, there will be serious discussions about the Internet - sales on the Internet."

Hull didn't say whether she supports or opposes such a tax, only that it's time to talk about it. But others are clearer about their position.

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"It's more of a fairness issue than a tax issue to me," said Jeff Hatch-Miller, R-East Phoenix, who headed a state Internet Study Committee that considered an Internet sales tax, among other things.

"As a study committee, we couldn't find any justification for a tax on shoes by one type of seller but not another," he said.

Under the current tax code, consumers can avoid paying sales taxes on items they buy online provided the seller doesn't have a presence, or nexus, in the state. For example, book purchases from Amazon.com are not taxed because the company doesn't operate a brick-and-mortar store in this state. But purchases from Barnes & Noble are taxed, because it operates stores in Arizona, giving it nexus in the state.

The different tax treatments grew out of the catalog business, which argued successfully before the U.S. Supreme Court that it should not be responsible for tracking the 7,500 individual taxing jurisdictions just so it could sell products by phone or mail. The argument didn't hold for sales from companies operating both catalogs and brick-and-mortar stores, because those retailers already track the tax rates.

Since the Internet is simply another form of remote selling, the tax exemption for catalogers was extended to e-commerce transactions. And it's quickly become popular with consumers.

A recent survey found that 57 percent of online shoppers decide to make purchases over the Internet, in part, because they often don't have to pay sales tax. The survey of 1,656 Web users by Internet researcher PC Data Online also found that eight of 10 respondents said online purchases should be tax-free.

Many tech companies agree, arguing that taxes on all online sales would discourage the growth of e-commerce.

Congress passed the Internet Taxation Freedom Act in 1998, which imposed a three-year moratorium that prevents states from putting a new tax on Internet access or discriminating in the way they tax online purchases.

Some in Congress want to make permanent the prohibition on new and discriminatory taxes. Others believe all bets are off when the moratorium expires Oct. 21, 2001. For now, all 45 states that have a sales tax are collecting what limited taxes are allowed on sales of merchandise over the Internet, according to the national Federation of Tax Administrators.

Proponents of Internet taxes maintain that the tax-free approach is outdated in the New Economy, which can more easily track all the varied taxing jurisdictions due to the widespread use of computerized data.

"Today, that argument has lost its validity," said Marshall Vest, director of economic and business research at the Eller College of Business and Public Administration at the University of Arizona.

"There are third-party venders that can process these orders in a blink of an eye, so is it still an unfair burden on these companies?"

Vest said online retailers currently enjoy a price advantage over mainstream brick-and-mortar companies. Taxing e-commerce "certainly is a fairness issue," he added.

More than fairness, is the issue of dollars and cents to local governments that are relying more heavily than ever on sales tax revenues to pay for goods and services. Indeed, an initiative to raise more money for Arizona schools hinges entirely on hiking the state sales tax rate from 5 percent to 5.6 percent.

The Nov. 7 ballot initiative is expected to generate about $450 million a year in tax revenue. But the initiative could be unnecessary, some argue, if goods sold over the Internet were taxed.

Nationally, the loss in tax revenue could hit $10.8 billion in 2003, according to a February study by the University of Texas. How much the loss would be to each state is difficult to determine.

The Arizona Department of Revenue does not track sales tax revenue from items sold by e-commerce retailers with a presence in the state. It also could not provide an estimate of how much potential tax revenue is being lost because of e-commerce.

Vest estimates the potential number for Arizona could, in about five years, be as much as $400 million to $600 million annually.

But Dennis Hoffman, dean of Arizona State University's masters of business administration program, warned against overestimating lost revenue because the bulk of e-commerce is from non-taxable transactions, such as the sale of stock, airline tickets and business-to-business goods.

"It's not an issue that's resulting in massive losses to the general fund," he said. "The mistake is taking the big number of Internet sales and multiplying it by 5 percent."

But Hoffman, who consults on tax issues for the state, allowed that the situation could change as more people buy big-ticket taxable goods online.

"I do believe we need to monitor it," he said. "If more and more people start going online to order items like furniture, that would have a real sales-tax (revenue) impact."

Legislators debate proposals for e-commerce taxes

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