Where's the Store?

  |  July 16, 2001   |  Comments

In the real world, stores collect sales taxes from people and then pay the money to local government. But where is the store in cyberspace? Who'll pay how much to whom? And how will the money reach government? Guess who the burden is going to fall on...

A recent survey, conducted in May and June, shows that most Internet users approve of sales taxes on Internet transactions.

Now, let's take this with a grain of salt. The company that administered the survey are the same folks who brought you "President Al Gore." (The Markle Foundation paid for the survey.)

When asked whether Internet transactions should be subject to the same laws as real-world transactions, 60 percent of survey respondents said yes, Boston.com reported. Support was strongest among wealthy Republicans, weaker among those who actually shop or invest online.

The result is important, because a three-year moratorium on Internet sales taxes expires later this year. Some states, Ohio for one, have already begun trying to collect such taxes, calling them "use taxes."

Although Ohioans might criticize the Ohio effort, the state is at least honest about a question that the advocates of Internet sales taxes have never properly addressed: Where is the store?

Sales tax has always been a burden on business. Stores collect tax on purchases and then pay the money to a local government. A store in DeKalb County, Georgia, collects taxes at the DeKalb rate and pays them to DeKalb, even on purchases made by residents of Fulton County (which has a higher rate). The idea is that the tax pays for government's costs in helping the store stay in business -- the educated customers, the roads, the sewers, and the police protection.

In the real world, consumers can avoid sales taxes. If you're in New Jersey, you shop in Delaware. If you're in Washington, you shop in Oregon. Delaware and Oregon have no sales taxes, so the stores there don't collect them.

But where is the store in cyberspace? When most local governments think of the money they're "losing" from sales taxes, they're thinking in terms of their residents, not their stores.

In the mail-order industry, taxes are collected only where a store has a physical location, or "nexus." People in Maine pay sales taxes for their L.L. Bean purchases, while those in Texas do not.

California lawmakers tried to extend this idea of a nexus last year with a law claiming that "branding and other intangibles" create nexus and, thus, a tax liability. Governor Gray Davis vetoed it.

This is just one question the Advisory Commission on Electronic Commerce, headed by Virginia Governor James Gilmore, failed to resolve last year.

The Ohio law at least has honesty on its side. It imposes the equivalent of a sales tax on you, on what you buy anywhere, based on where you live. It also moves the burden from stores to people.

But that's not very efficient, and that's not what most governments want. The U.S. Senate is now wrestling with a bill that would impose sales taxes on all Internet purchases based on where the purchaser lives, if only half the states have simplified their tax systems.

Sen. Ron Wyden, D-Oregon, wants to extend the current moratorium by five years, while House Majority Leader Dick Armey, R-Texas, supports just a three-year ban. (Why does the liberal seem more antitax than the conservative? Wyden's Oregon has no state sales tax, whereas Armey's Texas has the nation's highest rate.)

Still, there's only one conclusion to draw. The burden of figuring, collecting, and paying sales taxes is coming to U.S. Internet merchants. While governments are wrangling about what they're going to demand, it's time for merchants -- and their software suppliers -- to figure out how we'll comply.

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Dana Blankenhorn

Dana Blankenhorn has been a business reporter for more than 20 years. He has written parts of five books and currently contributes to Advertising Age, Business Marketing, NetMarketing, the Chicago Tribune, Boardwatch, CLEC Magazine, and other publications. His own newsletter, A-Clue.Com, is published weekly.

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