MPR: Should Cyberspace Be Tax Free?

Should Cyberspace Be Tax Free?
by Laura McCallum
December 17, 1999

A panel on electronic commerce, which met this week in San Francisco, has yet to tackle the question of whether to tax Internet purchases. As online shopping increases, states are beginning to ask whether an important source of revenue - the sales tax - will be eroded. There's no consensus among lawmakers, retailers or industry experts on the issue.

According to BizRate.com (www.bizrate.com), an e-commerce rating site and marketing research firm, nearly 60 percent of consumers would make fewer purchases if they had to pay a sales tax on all Internet purchases. The Flash Survey compiled feedback from nearly 17,000 online buyers at the online point-of-sale as part of a partnership between BizRate.com and the Association for Interactive Media (AIM), a voice for electronic commerce and online activity. Among the findings:

Buyers with incomes under $20,000 are less likely to make online purchases if a sales tax is imposed.

Buyers under the age of 35 (63 percent) are more likely to reduce their online purchases due to a sales tax than older buyers (57 percent) are.

Men (65 percent) are more likely than women (53 percent) to make fewer purchases if faced with a sales tax.

Experienced online buyers (60 percent) said they would be more likely to reduce online purchases due to a sales tax than first-time buyers (50 percent) would.

Only three percent of respondents said they would never buy online if they had to pay a domestic sales tax on all online purchases.

Approximately 87 percent of online buyers said they do not purchase goods online solely to avoid a sales tax.

AMERICANS WILL DO most of their holiday shopping the traditional way this year: going to the mall, picking out gifts and plunking down money, to the tune of more than $180 billion. Many shoppers will also do some of their buying online for the first time; e-shopping this holiday season could double to $6 billion. That's still pocket change compared to the brick-and-mortar sales, but enough to raise concerns among many states which aren't getting a piece of the action.

If you buy a book from Amazon.com or a CD tower from the Sharper Image Web site, you probably don't pay any tax. Should you?

Wilke: The answer is: it depends.

Larry Wilke is director of the sales tax division for the Minnesota Department of Revenue. He says it depends on how much you spend.

Wilke: We have a $770 diminimus rule that says if you keep your purchases below that, you're not required to pay the state's use tax.

The use tax is similar to the sales tax, but applies to purchases from a company that doesn't have a store or physical presence in a state. So if you buy, say, a computer, through the Internet, or spend more than $770 on your online gifts, Wilke says you're supposed to fill out a tax form called UT1, report your purchases and pay the use tax.

Wilke: There they would have to volunteer. They would have to come to us to ask for that tax return.
MPR: Does anybody do that?
Wilke: Not very often.
MPR: Two people a year?
Wilke: It's more than that, it's surprising there are some.

Still, states obviously aren't collecting much from online purchases. Estimates of uncollected tax revenues for 1998 range from $170 million to $1.2 billion. A federal moratorium on new Internet taxes runs through October 2001, but Wilke says that doesn't prevent states from collecting the use tax, if they could figure out a way to do it.

The sales tax makes up about one-third of Minnesota revenues. DFL State Senator Steve Kelley of Hopkins, who co-chaired a legislative working group on taxing telecommunication services, says the uncollected e-taxes could become an issue, as Internet sales increase, and if people buy more big-ticket items online.

Kelley: There is some potential loss for the state budget for an important component of our three-legged stool of state taxes: income, sales and property tax. So the potential for erosion is there, and it is a significant potential number.

But with many states awash in surplus money, most lawmakers are reluctant to jump on the tax bandwagon. Kelley says he's less interested in the untapped revenue source, and more concerned about the unfairness of imposing sales tax on store purchases, and not on e-purchases. Many retailers have cried foul, although opinions vary, according to Annette Henkel, president of the Minnesota Retail Merchants Association.

Henkel: We had one member who is concerned. People come into his store, try a shoe on, and then go back home and buy it. And so that drives him crazy, obviously. So that's very frustrating, so he would like to see some kind of tax. But then you've got some other members, who think of online as kind of an add-on sale, and they like that idea as another avenue for people to buy. So they're not quite sure that they do want to tax it totally.

See the Legislation
The bill establishing an Internet sales tax is S.1433. See a copy of it here.

Henkel says she's not heard any retailers say online sales are putting them out of business, but many are closely watching this holiday season to see whether the .com sellers thrive, and how that eats into their sales.

In addition to the issue of fairness to retailers, some policy-makers have raised concerns about whether exempting Internet purchases from taxes is fair to all citizens.

Mike O'Connor is the retired co-founder of gofast.net, the Twin Cities' first ISDN Internet service provider. He served on the legislative working group on telecommunications taxes, and says he became convinced that online shoppers shouldn't be allowed to skirt paying sales tax.

O'Connor: When a group of people who have access to the Internet can avoid a tax that other people who can't afford access to the Internet have to pay, that's a fairness problem. If you presume that wealthier people have access to the Internet and poorer people don't, and poorer people are getting hit with sales taxes as a result, now you've got a regressive tax that's even more regressive, because the poor people are getting hit proportionately even harder, and that I think is a big problem. Now that's not Mike O'Connor, industry expert, talking, that's Mike O'Connor, just regular citizen-type guy.

O'Connor says when he served on the the legislative working group, he fought against taxing the Internet because he worried about squelching an emerging industry. But he says now that it's clear the Internet is here to stay, he doesn't think imposing a sales tax would hurt e-commerce.

Many industry watchers say online shoppers are primarily motivated by convenience, and would be willing to pay tax on their purchases. Still, many anti-tax groups, most of the Republican presidential candidates and much of the e-commerce industry have called for a permanent ban on Internet taxes, arguing taxation would slow economic growth by shackling the Internet. Darrell McKigney is president of the conservative Taxpayers League of Minnesota.

McKigney: I certainly think there are some state officials that just are rubbed the wrong way when they see somebody getting away without paying some tax on something, it seems unnatural to them. But the Internet is clearly the wave of the future, it's a great commerce opportunity and it's something that's in its infancy that we ought to be encouraging rather than trying to tax it and make it more difficult and discourage, really, the growth of the future.

If Congress does ban Internet taxes, some political leaders say the state sales tax will no longer be a viable revenue source. DFL Senate Majority Leader Roger Moe predicts one of two possible tax changes.

Moe: State and local units of government might want to get out of the sales-tax business, which means then if you're going to generate the same amount of revenue, it's going to have to go onto some other tax, which I don't think sounds very attractive to most people. Or you're going to see the Congress impose a national sales tax.

States are beginning to lobby the National Advisory Commission on Electronic Commerce on the issue. Both South Dakota Governor Bill Janklow and Hennepin County Commissioner Randy Johnson testified before the panel this week.

The commission has an April deadline for submitting its recommendations on Internet tax policy to Congress. But the panel is divided on the issue, and its chairman, Virginia Governor James Gilmore, wants to keep the Internet a no-tax zone.

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