A hex on your taxes
Politicians and Web retailers want to keep e-sales levy-free.
But others are vexed
By ROMESH RATNESAR
December 20, 1999
Web posted at: 1:13 p.m. EST (1813 GMT)
Call him a relic, but Clifford Waldeck likes doing business
off-line. His 5,000-sq.-ft. office-supply store in downtown San
Francisco rings up about $1.6 million a year selling paper clips
and printer cartridges to customers from the nearby financial
district. "Our business is based on people being in the
neighborhood," he says. But Waldeck fears his walk-in patrons
will soon realize that they can buy all the stationery they want
from stores on the Internet--and never pay a dime of sales tax.
As vice mayor of Mill Valley, a San Francisco suburb, Waldeck
has another reason to be irked. Tax-free e-commerce transactions
could ravage his city's sales-tax revenues. "I feel like I'm
being double hit," he moans.
And so Waldeck and scores of big and small businesspeople like
him last week vented their frustration over one of the new
economy's most combustible issues. Their forum was a hearing in
San Francisco held by the 19-member advisory commission on
electronic commerce, a congressionally created panel that has
until April to recommend a policy on how to handle Internet
taxation after Congress's three-year moratorium on e-commerce
taxes expires in 2001.
The debate has become a crash site where business, politics and
technology collide. It's a bad scene for civic-minded
policymakers and a grand opportunity for electioneering
candidates. "Some people decided early on they...weren't going
to budge," says Oregon Senator Ron Wyden. "The whole process has
become thoroughly politicized."
Given the billions at stake, that comes as no shock. Because
e-tailers have no "physical presence"--such as a store or
warehouse--in most states, they are not required to collect
sales tax from customers. (They're supposed to pay the tax
themselves, but no one does.) Web business owners argue that
this is fair, since their companies don't benefit from services
funded by sales taxes, such as garbage collection and policing.
But state and local governments howl that the $10 billion a year
in tax revenues they expect to lose to the Internet by 2003 pay
for the roads that online merchants use to deliver their goods
to customers. Bricks-and-mortar executives fume that the absence
of e-commerce taxes makes their sexy online competitors look
even more irresistible. Slow out of the gate, lobbyists for
those forces are gaining clout on Capitol Hill.
They need it. G.O.P. leaders have loaded the advisory commission
with antitax ideologues like former Microsoft lobbyist Grover
Norquist and Virginia Governor James Gilmore, the commission's
chair, who has proposed a permanent ban on Internet taxes. That
idea is opposed by the Clinton Administration and a group led by
Utah's Republican Governor Michael Leavitt, which favors an
Internet tax system. The commission, which is considering a
broad range of e-commerce issues, is headed for a stalemate on
this one. Says panelist John Sidgmore, vice chairman of MCI
WorldCom: "We're going to agree on just about everything except
the sales tax."
That's fine with the four major presidential candidates, who
don't want to upset their high-tech contributors. John McCain
has vowed to "keep the Internet tax-free forever"; George W.
Bush has not taken the same pledge but is unlikely to back any
new taxes. Democrats Bill Bradley and Al Gore won't say never to
online taxation, but both support keeping the Net tax-free
Yet keeping the status quo could have risky consequences.
Leaving e-commerce untaxed amounts to a bonanza for Web
entrepreneurs and Americans who own computers with Internet
access. Within a few years, low-income customers could end up
paying a disproportionate share of state and local taxes at
stores like Waldeck's Office Supplies. That's if they still
exist. Clifford Waldeck says he now makes 7% of his sales
through his company's newest feature, its website.
--Reported by Sally B. Donnelly/Washington and David S.
A federal commission is weighing three views on imposing online
Blanket tax exemption for e-commerce.Top choice of Web retailers
Sales tax applies only if online merchant has a physical
presence in a state to which it ships goods
Credit-card companies collect tax on online purchases and
immediately remit it to the states
MORE TIME STORIES:
Cover Date: December 27, 1999