Why it's Time to Tax Internet Sales

From PC World.com:

Buying an $800 couch or television via the tax-free Internet can be nearly $80 cheaper than a purchase made in a high-sales-tax city like San Francisco -- such a deal. But the free ride is costing states and cities billions of dollars a year, and it damages local businesses that find it hard to compete.

The Main Street Fairness Act, introduced this month by Rep. Bill Delahunt (D-Mass.), would end the exemption for big Web retailers like Amazon.com and eBay that fear the change would be a body blow to their business. The Web sales tax issue has been debated and litigated for years, and it is hardly a popular cause, but with state and local governments deeply in debt, the chance to add a massive revenue stream may outweigh the political risks.

The seven-term Delahunt will not be running for re-election, but it would be unfair to see the timing as opportunistic. Delahunt sponsored a similar bill in 2008. I don't enjoy paying taxes any more than the next guy, but Delahunt was right then and he's right now. The Internet is no longer a baby that needs to be cosseted and protected from the real world, and favoring Internet business over brick-and-mortar ones via a tax exemption is not fair.

The budget hole provides the necessary opening for equal taxation

If you want government services, someone has to pay for them. The amount of money governments are losing due to the exemption is staggering. Uncollected use taxes (a use tax is pretty much the equivalent of a sales tax) for the six-year period ending in 2012 will range from $52 billion to $56 billion nationally, according to a 2009 study by economists at the University of Tennessee. New York City alone will lose at least $390.6 million in 2012; Chicago $229 million, they predict.

Online Gambling Tax May Be Jackpot for Congress, Lawmaker Says

A tax on online transactions has already been instituted in several state and local governments, but Congressman Jim McDermott is suggesting the Federal government begin taxing one specific type of online transaction – gambling over the Internet. McDermott said making this bold move could raise as much as $42 billion over a 10 year period. Check out a portion of the BusinessWeek.com story below.

“It’s a human activity that people are going to do and it’s a good place to pick up some dough,” said McDermott, a Washington Democrat, in an interview. “I’ve gotten a thousand ideas pumped at me about what we should do with the money.”

The House Ways and Means Committee tomorrow will consider his proposal, which depends on passage of a separate bill to legalize some Internet gambling and roll back a law designed to block wagering beginning June 1. That bill would let U.S. residents gamble online with companies licensed by the Treasury Department.

Las Vegas-based Harrah’s Entertainment Inc., the world’s biggest casino company, is among companies and groups lobbying Congress to legalize online gambling.

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From CBSNews.com:

Jeremy Bray received an e-mail message this morning with an unwelcome surprise: Amazon.com told him it had canceled its affiliate program, which provides small payments for referring customers, for everyone in the state of Colorado.

The reason? A state law, which Democratic Gov. Bill Ritter signed last week, slaps onerous new restrictions on large out-of-state sellers like Amazon, which said it has no choice but to end its marketing program in response.

Bray, a blogger who has lived in Pueblo, Colo., for more than 20 years, told CNET on Monday that he's now trying to "bring as much attention to the issue as possible in hopes of getting Colorado to repeal" the new law.

Colorado is not alone. Fifteen other states have considered or are considering enacting laws targeting Amazon and other e-commerce companies that typically do not charge sales tax for shipments sent outside their home state, according to a report released Monday. Four states including Colorado have already enacted them.

"I see this as a trend moving along - a lot of states are considering doing it," said Joseph Henchman, director of state projects at the non-partisan Tax Foundation in Washington, D.C., which published the report. But, Henchman says, the laws "won't solve short-term budget problems, they signal business-unfriendliness, and they're probably unconstitutional."

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California Tax Collectors Want Their Cut n Out-Of-State Sales

State tax collectors in California plan to target businesses that made expensive purchases online to avoid California’s high sales tax rates. The LA Times posted an interesting article about the states latest attempt to increase revenue and you can find a segment from their story below.

Under a law passed over the summer, the state Board of Equalization will send 184,000 letters by the end of the year to service businesses such as law firms, child care companies and Lasik eye surgery centers that have more than $100,000 a year in revenue.

The tax board is looking for out-of-state purchases, especially of expensive equipment, fixtures or software that might be subject to the levy, known as a "use tax."

The notices order the companies to register with the tax board and, by April 15, report and pay tax owed for the last three years or prove why they are exempt.

If the tax board doesn't hear back from a business, the agency will automatically register it in February.

"The idea is to give us a means to contact them where we didn't have that before," said Anita Gore, a tax board spokeswoman.

Time For State, U.S. To Tax The Internet

From the SFGate.com:

Back in the dial-up days of the Internet, the remarkable new technology seemed certain to change our lives - if only it could grasp a fragile hold on the marketplace. Convinced that they were working for the greater good, politicians of all stripes agreed to maintain the Internet as a "tax-free" space, enabling consumers to grow accustomed to communicating, researching and shopping online.

As an editorial board, we championed this approach for many years. "The current moratorium on Internet taxes is justified," we wrote in 1999. "It gives the fledgling e-commerce industry a chance to develop and encourage innovation on the Internet."

Times have changed.

Ten years later, it's no longer possible for us to argue that anything about the Internet is fledgling. The technology has changed the way we learn, make friends - even find spouses. E-commerce, once a tiny segment of the American retail landscape, has done so well that it's ravaged long-standing brick-and-mortar business models.

It's also ravaged government tax coffers. In 2007, California alone lost about $1.2 billion in state and local taxes to customers using the Internet to make purchases from out-of-state retailers. Though taxpayers are legally bound to pay sales tax on these purchases, the reality is that no one reports it, and the state has no way to collect.

The economic downturn, combined with a genuine concern for struggling local retailers, has politicians all over the country taking a new look at taxing Internet purchases. We agree that the time has come.

There's no more rationale for out-of-state retailers to get a tax subsidy that our own local retailers aren't getting.

The ideal solution would be for Congress to institute a federal law allowing states to force out-of-state retailers to collect sales tax. Unfortunately, the efforts seem to be stalled at the federal level - that's where Internet industry and anti-tax advocates have been able to most effectively block legislation.

Their arguments are thin. They claim it would be too complicated. Sure, it wouldn't be easy. There are 50 states, and each of them has different laws about which items can be taxed and for how much. But so far, 36 states have signed on to the Streamlined Sales Tax Project, which would unify tax rules and definitions across state lines. Once all 50 states sign on, it would be fairly easy for some enterprising software designer to create a program for e-commerce retailers. And all 50 states are likely to sign on quickly if they know that federal legislation is pending.

Increasingly, though, penniless state legislatures are seeking to force Congress' hand. New York was the first state to require out-of-state online companies to collect sales tax on purchases sent to New York addresses - provided that the companies had at least one in-state agent or affiliate. The results of that law have been mixed: Many out-of-state online companies simply dumped their affiliate programs and continued avoiding taxes. But New York has collected more than $70 million in less than two years. And so far, the federal courts have upheld the statute.

Emboldened by New York's semi-success, Assemblywoman Nancy Skinner, D-Berkeley, has authored AB178, which would do the same thing in California. AB178 wouldn't be the full answer to California's sales tax collection problems. Like New York, we'd see some businesses simply dumping their affiliate programs, and they might choose to take the state to court. Both plans are inelegant solutions to a problem that must be dealt with at the federal level. But state legislators should still pass AB178, if for no other reason than it would push Congress to tackle the problem head-on.

"I do think, frankly, that if (AB178) were to pass, Congress would have to take some action on this," said Lenny Goldberg, executive director of the California Tax Reform Association. "Between California and New York, you'd see the discussion taking hold. AB178 would speed up the process."

AB178 is sitting in the Assembly Revenue and Taxation Committee. Recognizing that she has an uphill battle on her hands, Skinner designed it to be a two-year bill. But given California's fiscal disaster, legislators should recognize the urgency of passing a bill that would level the playing field for local retailers and force consumers to pay a tax they should be paying anyway.

Internet Tax Avoidance Hurts Jobs, Public

San Francisco Gate author Lenny Goldberg recently published a great article on how the legislatures avoidance of taxing Internet sales is hurting all Californians. Check out a portion of the article below, or you can find the full post here.

The demise of Cody's Books in Berkeley and Stacey's in San Francisco is a symptom of one of the key changes of our new era: the shift to the massive use of Internet sales instead of community businesses.

We are in a difficult period of transition for retailing in general and booksellers in particular. But it's particularly frustrating when the state's tax policies conspire with out-of-state sellers to inflict major damage on local businesses.

State-sanctioned tax avoidance is in fact what has been happening as a result of the failure of the state Legislature and of the state's sales tax agency, the Board of Equalization, to collect taxes on sales into California by companies with substantial presence in the state. Not only is Amazon.com abusing the law with regard to its massive sales into California, but a whole Web-based cottage industry has grown up based heavily on a business model of avoiding sales tax.

The issue has come to a head over a bill by Assemblywoman Nancy Skinner, D-Berkeley, whose legislation, AB178, is really about enforcing the sales tax law, which the Board of Equalization has failed to enforce. It says, simply, that Internet sellers with agents or representatives in the state have presence sufficient for them to be obligated to collect tax on sales to California and send it to the state.

The business model used by Amazon for years, and now by other businesses, is their "affiliate" program, by which thousands of California organizations and individuals solicit sales under a contractual relationship and receive a commission on the sales. Amazon's long-standing approach has been to gain a competitive advantage over other businesses by avoiding the collection of tax.

Founder Jeff Bezos has said he originally wanted to locate in Alameda rather than Seattle but wanted to sell tax-free into the huge California market. And somehow the company has managed to avoid the law that says that if it has representatives in the state - its affiliates - it must collect the tax.

California is not on the cutting edge of this issue. New York passed legislation that serves as the basis for Skinner's bill. Amazon did two things in response: It started collecting the tax from New York purchasers immediately, because it did not want to be liable for the money; and it filed suit. A New York court dismissed the suit, holding that Amazon had a presence in New York, and upheld the state. As a result, a number of states, California included, are attempting to follow the New York law.