The moment of truth is drawing near for the e-tax moratorium. Statistical half-truths have Capitol Hill flummoxed. But a parlous era lies before e-tailers that believe federal, state, and local legislators control the core of the e-tax maelstrom.

by Patricia Fusco ISP-Planet Managing Editor [August 8, 2001]

Last week the House of Representatives Judiciary Committee approved a bill that would extend the current moratorium on e-taxes—e-commerce sales taxation by state and local authorities—by five years. The legislative measure would also bar Internet access from being taxes—forever.

Currently, online sales are handled in the same way as catalog and telephone sales—if the retailer has a store in the purchaser's state, a sales tax is supposed to be added to the bill. But the Supreme Court has ruled that companies cannot be required to collect taxes in states where they have no physical presence—a rather cheeky proposition for "virtual retail" shoppers.

With the original moratorium established by the Internet Tax Freedom Act of 1998 is set to expire on October 21, Capitol Hill was bustling with e-tax hearings and markup meetings last week.

While Representatives took another step toward thwarting e-taxes for five more years, the Senate Finance Committee held a hearing as to whether the current moratorium should be extended at all. Senator Max Baucus (D-MT), chairman of the committee, said in his opening statement [PDF], "I, frankly, have not made up my mind yet on what is the best way to proceed."

Ranking Republican leader of the Committee, Senator Charles Grassley (R-IA), said he wanted to take a look at the numbers [PDF].

"This hearing is important because we are here to learn about the impact of cybershopping on state and local tax systems" Sen. Grassley said.

Wrong number
First to testify was the Assistant Director for Tax Analysis, Tom Woodward, from the Congressional Budget Office, [PDF]. Woodward offered committee members its on e-tax numbers.

"Forty-five states and the District of Columbia impose sales taxes on purchases made within their borders, and those taxes account for about 33 percent of their total tax revenue. Among states with sales taxes, 33 of them also allow localities to impose such taxes—those receipts make up about 12 percent of total local tax revenue. All of those taxing jurisdictions impose an equivalent "use" tax on their residents' purchases of items out of state," Woodward continued. "Such purchases, called remote sales, include items that have been ordered over the Internet, by telephone, or by mail. It is the collecting of taxes on remote sales that is at issue."

We disagree. The issue is not e-tax collection methods. The issue is how the other five states are supporting budgets without sourcing one third of their operational costs from sales taxes. These are the states that legislators should be "hearing" from.

Sen. Grassley's question remains to be answered—how much e-tax money are we talking about?

Imaginary number
Frank Shafroth, Director of State-Federal Relations, spoke on behalf of the National Governors Association. In his opening statement [PDF], Shafroth indicated that nearly 40 percent of all state revenues come from sales taxes. "It is the single most critical source of funding for public education in the United States," Shafroth said. "But, unless Congress moves to restore a level playing field, current industry and academic studies project States will lose between $10-20 billion in sales tax revenues by 2003," he warned. And Shafroth had a chart to prove it:

Let's analyze Shafroth's statement closely; "current industry and academic studies project States will lose between $10-20 billion in sales tax revenues by 2003." Shafroth presumes that purchases made online will equivalently displace purchases made offline. We simply don't know this to be true. The data as presented could lead the Senate down a potentially dangerous path of building e-tax laws around faulty assumptions—compounded by annual projections.

But Shafroth's biggest numeric blunder is that the data ignores sales tax exemptions—most business-to-business (B2B) transactions are not subject to sales taxes. That is, unless state and local legislators have some new B2B e-tax up their sleeves.

Shafroth's data as presented is erroneously inflated at best—downright misleading at its worst. This must be the "New Governor's Math" we've all heard so much about—take B2B sales taxes states don't have today, more then double it over a fixed time, and extrapolate its equivalence in business to consumer (B2C) sales taxes in order to determine real e-tax revenue lost.

What ever happened to "nothing from nothing is nothing?"

Mixed number
Next up with a new set of e-tax numbers was Steven Rauschenberger, speaking on behalf of the National Conference of State Legislatures. In his opening statement [PDF], Rauschenberger wanted to make it clear that state legislators are not advocating any new taxes on e-commerce.

"We desire, however, to create a streamlined sales and use tax collection system to more efficiently collect the transactional taxes legally imposed by our states," Rauschenberger said. "According to the Center for Business and Economic Research at the University of Tennessee, in 2003 alone states will lose $11 billion in sales tax revenue due to the emergence and growth of electronic commerce."

Yikes! Rauschenberger's "lost" sales tax tally is about $1.5 billion higher than Shafroth's sum, which we've already ascertained is dramatically inflated.

Evidently Sen. Grassley's question presents quite an e-tax enigma. But that won't stop us from providing an answer for the honorable Republican from Iowa.

Numbers crunch
According to eMarketer's eCommerce:B2C Report, consumers spent $59.7 billion online in 2000, compared to $30.1 billion in 1999, a 98 percent increase. eMarketer projects B2C global e-commerce revenues will reach $101 billion by year-end 2001, rising to $167 billion in 2002 and $250 billion by 2003.

Too bad we don't have a U.S. figure … Let's keep searching.

According to Boston Consulting Group, North American e-commerce market is expected to grow 45 percent in 2001, reaching $65 billion.

Okay, so the data includes Canada … Let's try again.

According to Datamonitor's IMPACT 2001 interactive consumer survey, U.S. e-commerce revenue will hit $38.7 billion in 2001. Drat!

We don't know if this is retail sales … Let's keep looking.

According to Plunkett Research, U.S. cash registers rang up an estimated $3.2 trillion in sales last year—about a quarter of that coming from general merchandise, apparel and furniture sales. Online e-tail sales reached $33 billion in 2000 due in large part to sales made by Internet giants like Amazon.com, Dell Computer, and Gateway plus traditional retailers such as J.C. Penney and Wal-Mart. Basically, online e-tailers rang up one percent of the sales traditional retailers produced.

That's right, folks—what's on the table for e-taxes this year if the current moratorium is not extended amounts to one percent of traditional retail sales.

Common numbers
Even though experts can't agree on the number of dollars e-taxes could reap anymore that analysts can pinpoint online sales projections, there are some levels of agreement among e-tailers and retailers, as well as federal, state, and local governments when it comes to e-taxes.

They all agree that there should be a level playing field when it comes to e-taxes and conventional sales taxes. There is also agreement that substantial sales tax simplification should precede with Congressional support in order to equalize both clicks and bricks sales taxes. And there is agreement as to most of the major elements sales tax streamlining should encompass.

The very few elements that remain disputed, like state collection methods, revenue distribution, and accounting issues, could be addressed during the proposed extension of the e-tax moratorium over the next five years.

There is one more matter upon which all parties agree—discussions taking place at the Organization for Economic Cooperation and Development (OECD) and the European Commission (EC) focusing on how to apply value added taxes (VAT) to sales of digitized goods and services—such as music, software, and information services—are more of a threat to U.S. economic growth than any Congress-approved state-collected e-tax of online sales.

— End