Taxes and the Internet: Haven't We Heard This Before?

Consider just a few of the exciting e-commerce frontiers clouded by uncertainty about the problems that taxes may create:

• ' This year, Congress must once again confront the 1998 Internet Tax Freedom Act (see, http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=108_cong_publiclaws&docid=f:publ435.108), the latest renewal for which is set to expire on Nov. 1 (www.internetnews.com/bus-news/article.php/3684846; www.infoworld.com/article/07/06/21/government-groups-oppose-permanent-Net-tax-ban_1.html?source=searchresult; www.townhall.com/Columnists/JackKemp/2007/06/25/keep_the_internet_tax-free). That law, which banned taxes specifically directed at the Internet (including taxes on access services), has resisted, through multiple renewals, efforts of industry lobbyists to make its prohibitions permanent, despite little evidence that any state has tried to tax the expanding breadth of content sold online (or that industry has tried to shoehorn other new services into the existing law's ban on discriminatory taxation).
• Whether online merchants must collect sales taxes on Web purchases remains a contentious and unresolved issue ' and an increasing revenue drain for many states. But, as discussed in 'The Tax Collector e-Cometh' (see, the March 2005 edition of e-Commerce Law & Strategy (www.lawjournalnewsletters.com/issues/ljn-ecommerce/21-11/news/144041-1.html), many large national retailers have recently begun to collect taxes, because they've conceded that their real-world presence in so many states creates the 'tax nexus' that legally requires them to do so (http://news.bookweb.org/news/4024.html;http://news.bookweb.org/news/3590.html). Yet at the same time, some equally large firms continue to deny any such duty, and provide 'tax free' shopping to customers who are willing to violate the law by not paying their state's corresponding 'use tax' assessed on customers who purchase from sellers not under any legal duty to collect the sales tax.
• Online gamers had to be shocked by recent suggestions from bureaucrats that virtual assets in online-only communities such as Second Life (but for which real-world markets, and purchase prices, exist) may themselves be subject to tax on profits resulting from bartering ' trading, buying and selling ' that takes place in those games (see, www.tax-news.com/asp/story/story_open.asp?storyname=25222; www.gamespot.com/news/6162654.html; and 'New Kinds of e-Commerce: Asset Creation, Seclusion And Money Laundering in The Virtual World: It's a Real Problem That Could Easily Get Worse,' in the August 2006 edition of e-Commerce Law & Strategy). A report from Congress' Joint Economic Committee was expected in August (see, http://news.com.com/8301-10784_3-9733848-7.html?tag=bl, and 'The Virtual Taxman Cometh? Congress Is Examining Whether Gains Made Playing Online Games Should Be Taxed,' in the December 2006 edition of e-Commerce Law & Strategy).
• The millions of people who use online auctions ' and the operators of those Web sites ' must contend with a quiet Internal Revenue Service ('IRS') proposal that would require such sites and other virtual marketplaces to collect and report data on online purchasers and sellers to make it easier to collect taxes due on those sales, possibly including income taxes on real-world profits (see, http://news.com.com/Selling+stuff+online+Here+comes+the+IRS/2100-1028_3-6176041.html?tag=item; www.cdt.org/publications/policyposts/2007/7). This effort would be particularly directed at those who now can sell enough through online auctions, on a regular basis, to earn their living, but might not pay taxes like other traders. Let me clarify that one potential issue, the widely rumored tax on e-mail (see, www.snopes.com/business/taxes/bill602p.asp; http://web.archive.org/web/20010604232122http://new.usps.com/cgi-bin/uspsbv/scripts/content.jsp?D=13643) is, in fact, nothing more than a rumor. With all these real tax concerns, no one should worry about an e-mail tax.

What Goes Around Often Stays Awhile

But haven't we heard all this before? Taxing e-commerce, and Internet activity in general, has been a recurring theme almost as long as the Internet has attracted buyers and sellers. And why not? As the volume of e-commerce has steadily climbed, sales that would have been taxed offline have moved away, along with their tax revenue. Indeed, just in my own technology columns (most recently, for instance, in 'The Tax Collector e-Cometh,' mentioned above), taxing online sales has been a recurring theme in business circles. Taxes and the Internet have generated a continuous stream of discussion ' but not much more. For all that has been written over the years, remarkably little has happened, other than the passage (and periodic temporary renewals) of the Internet Tax Freedom Act, and pressure on national firms' online operations to collect tax (as described below). The 'problems' ' untaxed economic activity ' that have created so much uncertainty for e-commerce firms and their customers alike remain just as much of an unknown risk, without a solution in sight. Perhaps the continued growth of e-commerce will simply be the unintended result of this inaction, the tax accountant's equivalent of the physician's motto, 'do no harm' ' that is: our tax system has done nothing to get in the way of e-commerce. As one writer put it, somewhat less charitably: 'It's too bad that federal lawmakers have lacked the courage to tackle the e-commerce taxation issue' (see, http://theoaklandpress.com/stories/061007/opi_20070610146.shtml).