A Taxing Debate

Uncle Sam may soon be taxing your latest Amazon.com purchase.The ongoing debate over charging taxes on Internet sales took a new turn last week when the Federally appointed Advisory Commission on Electronic Commerce announced it would accept outside proposals on how to best implement an equitable tax system for e-commerce. The announcement alarmed many Internet activists and anti-tax politicians who claim that the Commission has yet to explain why e-businesses should be taxed at all. "It is far too early to be thinking of how to impose sales taxes on e-commerce," says Sheri Steele, an attorney for the Electronic Frontiers Foundation, a D.C.-based advocacy group. "It is still in its developmental stage."David McClure, the Executive Director for the Association of Online Professionals, is still waiting for the Advisory Commission to come up with a good philosophical reason for taxing Internet sales. "States are trying to position the Internet tax debate so it's about fairness," he says. "They say, 'if Mom and Pop shops have to charge consumers tax, so should e-tailers.'" But the reality, insists McClure, is that states want to get their hands on the sales tax revenues that are lost every time a consumer uses a remote seller over a local business - that is, they want the sales taxes that are going unpaid everytime you buy a CD from CDNow. Actually, it turns out there is such a charge already in place, known as the Use Tax. Consumers are supposed to pay this Use Tax every time they buy goods or services from a remote seller, like when Amazon sells to a buyer in New York. Since Amazon does not charge you sales tax whenever you purchase a book through their site, you are legally obligated to pay this Use Tax to Giuliani and Pataki because you will be making 'use' of the product in New York. Right now, nobody pays this charge because most states don't enforce it. It would be impossible for even Giuliani to keep track of the millions of small buys that are transacted daily via the Net.But not to worry, according to Aaron Lukas, a trade policy analyst at the Cato Institute. "Although consumers have a channel that is virtually tax-free," he says, "state governments have been adjusting our tax rates to allow for unpaid Use Taxes for a long time." In other words, the sales tax you're currently paying has been inflated to account for this uncollected Use Tax. The pro-NETtaxers, however, see it differently. An e-business can potentially sell to millions of remote customers without leaving its cozy home state of, say, New York. And while that e-business is busy luring in e-consumers from around the world, its earth-bound brick-and-mortar competitors will be left with fewer customers - and local governments with less sales tax revenue. So if the Commission caves to the wishes of pro-NETtaxers and finds a way to tax your latest E-bay score, it could be argued that it is a tax increase on top of the inflated sales tax you're already doling out other purchases. "If consumers end up paying another sales tax," Lukas says of a possible Net tax, "then what you've got is a tax increase - and one that will have been done without a legislative vote."Assertions like this keep some politicians wary of moving forward too quickly on the Internet sales tax issue. New York, which has shown itself to be a very friendly tech state, doesn't even have a representative on the Advisory Commission. But a spokesperson for Mayor Giuliani's office said that they "are monitoring the proceedings closely." Pataki and Giuliani both have gone to great lengths to make Silicon Alley - the city's technical area - a growth industry. The mayor's office claims that "the city is interested in promoting tax fairness and seeing a level playing field develop which insures vigorous competition." But as a recent study by accounting firm Ernst and Young pointed out, there is very little that is fair about forcing e-businesses to comply with tax regulations that could cost them 87 cents for every dollar. Unless the Advisory Commission arrives at a more equitable solution, the e-party might just be over. A version of this article originally appeared in the New York Daily News.

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