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

Famous 18th-century technology geek Benjamin Franklin once complained that 'nothing in this world is certain but death and taxes.' These days, perhaps it's certain that this quote will appear in any tax article, but if taxes were a problem for inventors in Franklin's era (and he was an accomplished inventor himself), it shouldn't be surprising that they continue to confound experts on the Internet and e-commerce today.

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).

Possible 'Truce' in SSTP?

Of course, efforts have been made to fix what revenue collectors see as broken. Most notably, the Streamlined Sales Tax Program ('SSTP') (www.streamlinedsalestax.org) attempts to create a voluntary agreement under which online retailers collect taxes from customers, and turn them in, even though the states do not have the constitutional authority to require them do so for most sales. (e-Commerce firms have always had to collect tax on online sales from a customer in the state where the seller is located.) Already, millions in taxes have been voluntarily collected and remitted to customers' home states by out-of-state sellers not required to go to that effort.

After all, the legal problem with collection of sales taxes is not with the customers ' unless they live in one of the few states without a sales tax ' because customers always owe sales or use tax on purchases that are otherwise taxable, whether made online, at the local mall or out of state in a location without sales tax. The issue is whether retailers with no connection to the customer's state can be forced to collect the tax on behalf of the state in which the customer resides, since (under our current system of thousands of state and local taxing agencies) the cost of collecting sales tax directly from customers would likely exceed whatever revenues were actually turned in. But for all the publicity that the SSTP has received, on July 1, Washington became only the 22nd state to join the program. In other words, 28 states still are going their own way ' which means, quite plainly, that a majority of the states have not yet joined the solution. Large states such as California, Florida, New York and Texas don't participate, even at the cost of foregoing tax revenue (see, http://sanjose.bizjournals.com/eastbay/stories/2007/02/12/story13.html).

Yet even the states that have joined the SSTP have already seen backsliding, as the SSTP's technical rules about which state gets to keep the tax start to kick in. In Ohio, for example, a budget amendment approved in June would allow 'small' retailers ' with sales under $500,000 ' to apply the existing technical rule that allocates tax revenue from a sale based on the seller's location, rather than the new, simplified rule that allocates tax revenue by the customer's location. (For more on this, see, '5739.033 of HB 119, at www.legislature.state.oh.us/BillText127/127_HB_119_EN_N.html.) Less than a month after the state of Washington joined the SSTP, critics began to complain about the inequity of diverting sales-tax revenues from Washington residents to other states as mandated by the SSTP ' see, www.columbian.com/opinion/news/06302007news160541.cfm. (Washington, of course, is home to Amazon.com, a prominent holdout on collecting sales tax beyond legal requirements to do so, but which clearly states its duty to collect taxes from Washington residents. See,
www.amazon.com/gp/help/customer/display.html/102-3979828-4386537?ie=UTF8&nodeId=468512&qid=1183928616&sr=1-1). In Texas, the Dallas Morning News mentioned that although technically unrelated to the SSTP, a technical interpretation that changed the location of one customer's sales has created huge changes in who gets tax revenue by shifting the location of a sale from the home of the retailer to its warehouse location, an issue similar to what will occur once the SSTP goes into full effect. Similarly, in Tennessee, after the Commissioner of the Department of Revenue wrote in 2005 'that compliance with tax laws by multi-state businesses is too complicated,' implementation of the SSTP was postponed that year, particularly because of the unknown effect of the change in the 'sourcing' rule (see, www.tnchamber.org/insider/May05.pdf).

In short, it can be hard to argue with the claims of the Direct Marketing Association ('DMA') that the SSTP hasn't accomplished its goals. In the DMA's view, the SSTP 'has barely reduced the tax-collection burden presented by 7500 different sales [tax] jurisdictions.' Rather than adopting a single tax rate per state, as the DMA demanded, the Streamlined Sales and Use Tax Agreement ('SSUTA') made only 'cosmetic' changes, and the states are 'cheating' on even those' (see, www.forbes.com/businessinthebeltway/2006/11/28/internet-sales-tax-congress-biz-wash-cz_jn_1129beltway.html). And not every state has been eager to get on the SSTP bandwagon. Idaho's legislature, for example, recently rejected a bill to join the SSTP (see, www.spokesmanreview.com/blogs/boise/archive.asp?postID=4925). In Tennessee, the effective date of the SSTP was postponed in 2005 until 2007 (see, www.tml1.org/hometown_connections/leg_priorities/streamlined_sales_tax/streamlined_remedy.pdf, and www.state.tn.us/revenue//streamlined/streamlinedtraining1005_files/frame.htm#slide0001.htm).

A Truly Taxing Matter

With all this controversy, perhaps the seemingly never-ending problems of taxes and the Internet are yet another example of something that 'ain't broke, so don't fix it' ' the solution may create more costs, legal fees, and confusion and uncertainty than getting taxes to the 'correct' taxing authority. But no one can deny that many buyers take advantage of the 'discount' that comes from not paying use tax when they buy from a seller not required to collect sales tax, and which doesn't participate in the SSTP. So, since this 'problem' has existed for many years, and remains the same as explained in many prior articles, why are we asking you to read yet another article on the matter?

Well, of course, several factors have come together in 2007 to bring taxes back to the forefront of politicians' (and e-commerce firms') concerns (for instance, see, http://news.com.com/Days+numbered+for+tax-free+Net+sales/2100-1028_36176638.html?tag=item).

First, as mentioned above, Congress must renew the Internet Tax Freedom Act. Without it, the states could add untold new line-item taxes to bills for cable and Internet access, like the charges that now clutter a landline phone bill. As former senator and vice-presidential candidate Jack Kemp recently wrote about this law on the Web site Townhall.com: 'Without permanence, state and local governments could soon view booming Internet access and commerce trends as an easy target for additional tax revenues to fund ever-expanding state and local spending. This potential is especially alarming, given the high level of taxes already imposed upon other communications services across the board, particularly wireless service.'

As technology continues to find new and more convenient ways of delivering goods and services (especially digital content) to consumers and businesses, state and local taxing authorities don't want to remain hamstrung in taxing that revenue stream by the broad-brush ban on taxation originally created several technological lifetimes ago in 1997. According to National Governors Association ('NGA') lobbyist David Quam, quoted on June 21 on the Web site Infoworld: 'Part of the objection to a permanent ban is the definition of Internet access that's carried over from the 1998 legislation. That bill banned taxes from access and 'other services as part of a package of services offered to consumers,' and that language may allow Internet providers to include voice, video, or music services in the ban. We haven't been able to change that troublesome definition, which frankly, is too broad.' Quam and Senator Carper of Delaware complained: 'NGA believes that the unlimited ability of providers to bundle together content and 'other services' into a single, tax-free offering represents a loophole.' They instead propose to 'fix many problems with the current law so that as future services, such as cable television, migrate to the Internet, we don't completely erode the tax base of state and local governments.'

Competing Interests, and Competing Solutions

Consider this, too: The continued growth of national retailing behemoths, and the success of their Web sites, has created a combination that has given many prominent online firms a physical presence (or tax nexus) in so many states that
few online shoppers can avoid sales taxes (as described above). As national firms drop the fiction that courts have begun to reject, that their Internet operations are separate from their brick-and-mortar stores (and without tax nexus anywhere they have a location), more and more sales have become taxable (and taxed) anyway ' according to an American Booksellers Association article about Barnes & Noble collecting online sales tax in 38 states, as of February 2006.

And for all the attraction of the quirky seller with a hip Web site, most of us prefer to hit the send link or button and furnish our credit card data to known firms, and with a local presence to which we can make returns, if necessary. None of us can deny that the effect of well-financed lobbying, and apparently, the combination of large sellers subject to the duty to collect tax and state governors seeking another revenue source, has quietly created a knot of forces to revive this issue, so that smaller online sellers can't compete by playing the 'tax-free sale' card. Moreover, as e-commerce continues to grow, national and international sellers have to deal with the complexity of many state and local tax rates and classifications; if collecting taxes on previously untaxed sales is the cost of reducing the compliance burden, then perhaps it may be worth it to many sellers. For example, under current law, one writer noted recently on ZDNet that, 'Some legal definitions tax Milky Way Midnight candy bars as candy and treat the original Milky Way bar as food. Peanut butter Girl Scout cookies are candy, but Thin Mints or Caramel deLites are classified as food.'

As e-commerce goes worldwide with the ease provided by the Internet and online bill-paying services, consider the complexities of adding international tax and allocations among countries, rather than just the states and local taxing authorities, with different traditions.

Also, a legislator has decided to push the issue in Congress one more time. Sen. Mike Enzi (R-WY) has for several years tried to jump start the goals of the SSTP through federal legislation, the Sales Tax Fairness and Simplification Act, by eliminating its voluntary aspects. 'The legislation would streamline the country's more than 7500 diverse sales tax jurisdictions by permitting states that become voluntary members of the SSUTA to require remote sellers to collect and remit sales and use taxes.' (Emphasis added.) And the proposed law would help ease the administrative burdens on sellers: 'The agreement would help harmonize states sales and use tax rules, bring uniformity to the definitions of items in the sales tax base, reduce the paperwork burden on retailers, and incorporate new technology to modernize administrative procedures.' Certainly, Enzi's bill would answer the cries of those frustrated with the lack of voluntary action over so many years. As one writer commented: '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). While Sen.Enzi's bill has stalled in the past, the convergence of the pressures for change mentioned in this article, and the states' need for a national revenue solution, may convince legislators that a painful fix for Internet taxation is easier than the alternatives. According to Enzi: 'Simply put, if Congress continues to allow remote sales taxes to go uncollected and electronic commerce continues to grow as predicted, other taxes, such as income or property taxes, will have to be increased to offset the lost revenue to state and local governments. I want to avoid that' (see, www.star-telegram.com/national_news/story/147517.html).

Not Everyone Is On the Same Side

But others are less optimistic, and see no reason to believe that the practical and political roadblocks to tax 'simplification' will recede, even in the face of aggressive lobbying by local legislators aggrieved by the loss of tax revenue and sales, and businesses harmed by 'tax free' competition (see, www.internetnews.com/bus-news/print.php/3683691). While simplification of thousands of tax codes seems like a good idea, simplification may also lead to redistribution of tax revenue among thousands of local governments ' never a popular political task. In other words, as Internetnews.com writer Roy Mark put it in a recent article (cited immediately above): 'Simplification, it turns out, is pretty complex.' And, as a senior Amazon.com executive described the revenue shifts caused by SSTP in the states that have adopted it: 'A lot of states are looking at the unintended consequences of the STTP, particularly on intrastate sales.'

So for e-commerce firms in 2007, and beyond, it appears that there may be some things even more certain than Franklin's proverbial death and taxes ' such as states' efforts to find new revenue, and the continuation of the SSTP debate. With so many powerful forces aligned on each side of the issues, perhaps the most likely result is a system as gridlocked as a computer with too many open windows. Businesspeople should also keep that stalemate in mind when buying systems and tax software for the future. No matter what a sales rep may warn you about, there may be no need to invest in an expensive SSTP solution when neither the SSTP nor a solution appears imminent.

However, e-commerce firms that depend on the 'sales tax discount' for business rather than otherwise better pricing, service or selection, may need to review their business models. Their owners and managers must remember that, ultimately, taxes do not drive all purchasing decisions. According to a professor and former Federal Trade Commission economist: 'But a sales tax won't solve all the problems for the mom-and-pop corner shop. It might shift a little bit of business back to brick-and-mortar sellers. But the real challenge they face is that even with sales taxes, you can find stuff cheaper online. They still have to deal with the fact that you have more variety online. And they still have to deal with the convenience factor (of shopping online)' (see, www.wired.com/politics/onlinerights/news/2007/06/internet_tax).

In other words, SSTP may have provided an interesting debate, even though no one knows if, how or when the sales tax disputes will be resolved. But when that day arrives, even if it is an imperfect solution, well-run e-commerce firms must be ready to maintain their e-advantages, rather than rely on their customers' willingness to ignore the law.

This article originally appeared in e-Commerce Law & Strategy, a sister publication of this newsletter.

Stanley P. Jaskiewicz, a business lawyer, helps clients solve e-commerce, corporate, contract and technology-law problems. He can be reached at the Philadelphia law firm of Spector Gadon & Rosen P.C., at [email protected], or at 215-241-8866.

Famous 18th-century technology geek Benjamin Franklin once complained that 'nothing in this world is certain but death and taxes.' These days, perhaps it's certain that this quote will appear in any tax article, but if taxes were a problem for inventors in Franklin's era (and he was an accomplished inventor himself), it shouldn't be surprising that they continue to confound experts on the Internet and e-commerce today.

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).

Possible 'Truce' in SSTP?

Of course, efforts have been made to fix what revenue collectors see as broken. Most notably, the Streamlined Sales Tax Program ('SSTP') (www.streamlinedsalestax.org) attempts to create a voluntary agreement under which online retailers collect taxes from customers, and turn them in, even though the states do not have the constitutional authority to require them do so for most sales. (e-Commerce firms have always had to collect tax on online sales from a customer in the state where the seller is located.) Already, millions in taxes have been voluntarily collected and remitted to customers' home states by out-of-state sellers not required to go to that effort.

After all, the legal problem with collection of sales taxes is not with the customers ' unless they live in one of the few states without a sales tax ' because customers always owe sales or use tax on purchases that are otherwise taxable, whether made online, at the local mall or out of state in a location without sales tax. The issue is whether retailers with no connection to the customer's state can be forced to collect the tax on behalf of the state in which the customer resides, since (under our current system of thousands of state and local taxing agencies) the cost of collecting sales tax directly from customers would likely exceed whatever revenues were actually turned in. But for all the publicity that the SSTP has received, on July 1, Washington became only the 22nd state to join the program. In other words, 28 states still are going their own way ' which means, quite plainly, that a majority of the states have not yet joined the solution. Large states such as California, Florida, New York and Texas don't participate, even at the cost of foregoing tax revenue (see, http://sanjose.bizjournals.com/eastbay/stories/2007/02/12/story13.html).

Yet even the states that have joined the SSTP have already seen backsliding, as the SSTP's technical rules about which state gets to keep the tax start to kick in. In Ohio, for example, a budget amendment approved in June would allow 'small' retailers ' with sales under $500,000 ' to apply the existing technical rule that allocates tax revenue from a sale based on the seller's location, rather than the new, simplified rule that allocates tax revenue by the customer's location. (For more on this, see, '5739.033 of HB 119, at www.legislature.state.oh.us/BillText127/127_HB_119_EN_N.html.) Less than a month after the state of Washington joined the SSTP, critics began to complain about the inequity of diverting sales-tax revenues from Washington residents to other states as mandated by the SSTP ' see, www.columbian.com/opinion/news/06302007news160541.cfm. (Washington, of course, is home to Amazon.com, a prominent holdout on collecting sales tax beyond legal requirements to do so, but which clearly states its duty to collect taxes from Washington residents. See,
www.amazon.com/gp/help/customer/display.html/102-3979828-4386537?ie=UTF8&nodeId=468512&qid=1183928616&sr=1-1). In Texas, the Dallas Morning News mentioned that although technically unrelated to the SSTP, a technical interpretation that changed the location of one customer's sales has created huge changes in who gets tax revenue by shifting the location of a sale from the home of the retailer to its warehouse location, an issue similar to what will occur once the SSTP goes into full effect. Similarly, in Tennessee, after the Commissioner of the Department of Revenue wrote in 2005 'that compliance with tax laws by multi-state businesses is too complicated,' implementation of the SSTP was postponed that year, particularly because of the unknown effect of the change in the 'sourcing' rule (see, www.tnchamber.org/insider/May05.pdf).

In short, it can be hard to argue with the claims of the Direct Marketing Association ('DMA') that the SSTP hasn't accomplished its goals. In the DMA's view, the SSTP 'has barely reduced the tax-collection burden presented by 7500 different sales [tax] jurisdictions.' Rather than adopting a single tax rate per state, as the DMA demanded, the Streamlined Sales and Use Tax Agreement ('SSUTA') made only 'cosmetic' changes, and the states are 'cheating' on even those' (see, www.forbes.com/businessinthebeltway/2006/11/28/internet-sales-tax-congress-biz-wash-cz_jn_1129beltway.html). And not every state has been eager to get on the SSTP bandwagon. Idaho's legislature, for example, recently rejected a bill to join the SSTP (see, www.spokesmanreview.com/blogs/boise/archive.asp?postID=4925). In Tennessee, the effective date of the SSTP was postponed in 2005 until 2007 (see, www.tml1.org/hometown_connections/leg_priorities/streamlined_sales_tax/streamlined_remedy.pdf, and www.state.tn.us/revenue//streamlined/streamlinedtraining1005_files/frame.htm#slide0001.htm).

A Truly Taxing Matter

With all this controversy, perhaps the seemingly never-ending problems of taxes and the Internet are yet another example of something that 'ain't broke, so don't fix it' ' the solution may create more costs, legal fees, and confusion and uncertainty than getting taxes to the 'correct' taxing authority. But no one can deny that many buyers take advantage of the 'discount' that comes from not paying use tax when they buy from a seller not required to collect sales tax, and which doesn't participate in the SSTP. So, since this 'problem' has existed for many years, and remains the same as explained in many prior articles, why are we asking you to read yet another article on the matter?

Well, of course, several factors have come together in 2007 to bring taxes back to the forefront of politicians' (and e-commerce firms') concerns (for instance, see, http://news.com.com/Days+numbered+for+tax-free+Net+sales/2100-1028_36176638.html?tag=item).

First, as mentioned above, Congress must renew the Internet Tax Freedom Act. Without it, the states could add untold new line-item taxes to bills for cable and Internet access, like the charges that now clutter a landline phone bill. As former senator and vice-presidential candidate Jack Kemp recently wrote about this law on the Web site Townhall.com: 'Without permanence, state and local governments could soon view booming Internet access and commerce trends as an easy target for additional tax revenues to fund ever-expanding state and local spending. This potential is especially alarming, given the high level of taxes already imposed upon other communications services across the board, particularly wireless service.'

As technology continues to find new and more convenient ways of delivering goods and services (especially digital content) to consumers and businesses, state and local taxing authorities don't want to remain hamstrung in taxing that revenue stream by the broad-brush ban on taxation originally created several technological lifetimes ago in 1997. According to National Governors Association ('NGA') lobbyist David Quam, quoted on June 21 on the Web site Infoworld: 'Part of the objection to a permanent ban is the definition of Internet access that's carried over from the 1998 legislation. That bill banned taxes from access and 'other services as part of a package of services offered to consumers,' and that language may allow Internet providers to include voice, video, or music services in the ban. We haven't been able to change that troublesome definition, which frankly, is too broad.' Quam and Senator Carper of Delaware complained: 'NGA believes that the unlimited ability of providers to bundle together content and 'other services' into a single, tax-free offering represents a loophole.' They instead propose to 'fix many problems with the current law so that as future services, such as cable television, migrate to the Internet, we don't completely erode the tax base of state and local governments.'

Competing Interests, and Competing Solutions

Consider this, too: The continued growth of national retailing behemoths, and the success of their Web sites, has created a combination that has given many prominent online firms a physical presence (or tax nexus) in so many states that
few online shoppers can avoid sales taxes (as described above). As national firms drop the fiction that courts have begun to reject, that their Internet operations are separate from their brick-and-mortar stores (and without tax nexus anywhere they have a location), more and more sales have become taxable (and taxed) anyway ' according to an American Booksellers Association article about Barnes & Noble collecting online sales tax in 38 states, as of February 2006.

And for all the attraction of the quirky seller with a hip Web site, most of us prefer to hit the send link or button and furnish our credit card data to known firms, and with a local presence to which we can make returns, if necessary. None of us can deny that the effect of well-financed lobbying, and apparently, the combination of large sellers subject to the duty to collect tax and state governors seeking another revenue source, has quietly created a knot of forces to revive this issue, so that smaller online sellers can't compete by playing the 'tax-free sale' card. Moreover, as e-commerce continues to grow, national and international sellers have to deal with the complexity of many state and local tax rates and classifications; if collecting taxes on previously untaxed sales is the cost of reducing the compliance burden, then perhaps it may be worth it to many sellers. For example, under current law, one writer noted recently on ZDNet that, 'Some legal definitions tax Milky Way Midnight candy bars as candy and treat the original Milky Way bar as food. Peanut butter Girl Scout cookies are candy, but Thin Mints or Caramel deLites are classified as food.'

As e-commerce goes worldwide with the ease provided by the Internet and online bill-paying services, consider the complexities of adding international tax and allocations among countries, rather than just the states and local taxing authorities, with different traditions.

Also, a legislator has decided to push the issue in Congress one more time. Sen. Mike Enzi (R-WY) has for several years tried to jump start the goals of the SSTP through federal legislation, the Sales Tax Fairness and Simplification Act, by eliminating its voluntary aspects. 'The legislation would streamline the country's more than 7500 diverse sales tax jurisdictions by permitting states that become voluntary members of the SSUTA to require remote sellers to collect and remit sales and use taxes.' (Emphasis added.) And the proposed law would help ease the administrative burdens on sellers: 'The agreement would help harmonize states sales and use tax rules, bring uniformity to the definitions of items in the sales tax base, reduce the paperwork burden on retailers, and incorporate new technology to modernize administrative procedures.' Certainly, Enzi's bill would answer the cries of those frustrated with the lack of voluntary action over so many years. As one writer commented: '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). While Sen.Enzi's bill has stalled in the past, the convergence of the pressures for change mentioned in this article, and the states' need for a national revenue solution, may convince legislators that a painful fix for Internet taxation is easier than the alternatives. According to Enzi: 'Simply put, if Congress continues to allow remote sales taxes to go uncollected and electronic commerce continues to grow as predicted, other taxes, such as income or property taxes, will have to be increased to offset the lost revenue to state and local governments. I want to avoid that' (see, www.star-telegram.com/national_news/story/147517.html).

Not Everyone Is On the Same Side

But others are less optimistic, and see no reason to believe that the practical and political roadblocks to tax 'simplification' will recede, even in the face of aggressive lobbying by local legislators aggrieved by the loss of tax revenue and sales, and businesses harmed by 'tax free' competition (see, www.internetnews.com/bus-news/print.php/3683691). While simplification of thousands of tax codes seems like a good idea, simplification may also lead to redistribution of tax revenue among thousands of local governments ' never a popular political task. In other words, as Internetnews.com writer Roy Mark put it in a recent article (cited immediately above): 'Simplification, it turns out, is pretty complex.' And, as a senior Amazon.com executive described the revenue shifts caused by SSTP in the states that have adopted it: 'A lot of states are looking at the unintended consequences of the STTP, particularly on intrastate sales.'

So for e-commerce firms in 2007, and beyond, it appears that there may be some things even more certain than Franklin's proverbial death and taxes ' such as states' efforts to find new revenue, and the continuation of the SSTP debate. With so many powerful forces aligned on each side of the issues, perhaps the most likely result is a system as gridlocked as a computer with too many open windows. Businesspeople should also keep that stalemate in mind when buying systems and tax software for the future. No matter what a sales rep may warn you about, there may be no need to invest in an expensive SSTP solution when neither the SSTP nor a solution appears imminent.

However, e-commerce firms that depend on the 'sales tax discount' for business rather than otherwise better pricing, service or selection, may need to review their business models. Their owners and managers must remember that, ultimately, taxes do not drive all purchasing decisions. According to a professor and former Federal Trade Commission economist: 'But a sales tax won't solve all the problems for the mom-and-pop corner shop. It might shift a little bit of business back to brick-and-mortar sellers. But the real challenge they face is that even with sales taxes, you can find stuff cheaper online. They still have to deal with the fact that you have more variety online. And they still have to deal with the convenience factor (of shopping online)' (see, www.wired.com/politics/onlinerights/news/2007/06/internet_tax).

In other words, SSTP may have provided an interesting debate, even though no one knows if, how or when the sales tax disputes will be resolved. But when that day arrives, even if it is an imperfect solution, well-run e-commerce firms must be ready to maintain their e-advantages, rather than rely on their customers' willingness to ignore the law.

This article originally appeared in e-Commerce Law & Strategy, a sister publication of this newsletter.

Stanley P. Jaskiewicz, a business lawyer, helps clients solve e-commerce, corporate, contract and technology-law problems. He can be reached at the Philadelphia law firm of Spector Gadon & Rosen P.C., at [email protected], or at 215-241-8866.