So in Cyberspace, Where Is the Store?

House Democratic leader Dick Gephardt released the party’s “technology platform” for the 2000 elections the other day and, as expected, it sided with Wal-Mart on the sales tax question.

Charging sales tax on Internet purchases, according to Gephardt, is a simple question of “fairness,” but how that happens, he said, is best left to others.

This is what political reporters call a cop-out. The Ecommerce Commission has finished its work and came up with nothing. Its final report won 11 of 19 votes, a slim majority but not enough, according to the rules on which it was founded, to deliver anything meaningful.

Worse, neither the majority report, nor any minority report (314k Word Doc.), really addressed the key question that must be asked before a sales tax can be applied to items bought on the Internet. That is, where is the store?

You see there’s a legal fiction underlying sales tax, which is that consumers don’t really pay it. It’s a business tax, paid to government by businesses, then passed on to consumers. If a business didn’t charge its customers sales tax, it would still owe that tax to the government.

Because business pays the sales tax, it’s based on service to the business, and the business’s location. If you live in California and buy a package of Twinkies in Nevada (assuming you can find any), you pay the Nevada sales tax, which goes to support Nevada’s needs.

So in cyberspace, where is the store? If we pay taxes based on a store’s location, then every cyber-store should quickly move to Montana, Oregon, New Hampshire, Delaware or Alaska, all of which have no sales tax. (Denizens of Vancouver, Wash., jokingly refer to their city as “East Berlin,” because if they shop there they have to pay Washington’s seven percent sales tax, but if they cross the river to Portland, Ore., they pay no sales tax at all.)

Current law deals with this through a concept called “nexus.” If you live in Wisconsin, you pay sales tax on purchases from Lands’ End. The same is true in Maine when you buy from L.L. Bean. This applies online as well, and it applies in every state where a merchant operates a facility.

Once a physical store is in place, a merchant has “nexus” throughout the state and pays tax to all local governments. So credit card processor National Data Corp., whose terminals are in the stores of every merchant it works for, is charged sales tax everywhere, whether or not it posts that tax on its bills.

This can quickly get very complicated. I had my webmaster, T. Bass, check out prices at Nordstrom.com from his home in Americus, in Sumter County, Ga. Nordstrom has a store where I live, in DeKalb County, Ga., which has a seven percent sales tax rate. Sumter County, on the other hand, charges just six percent. The rate Nordstrom.com came up with from Americus was six percent.

Presumably, Nordstrom has systems in place to send six percent of that purchase price to the state of Georgia and two percent to Sumter County, as the law dictates. Georgia has 159 counties in all, which can charge up to three percent sales tax it’s a local option. (On food not Twinkies, food there is no tax.)

I’ve gone on about this to point out the complexity and the burden it places on Nordstrom.com. Now multiply that by 50. If a cyber-store is inside your PC, this burden is placed on every cyber-store in the U.S., even Powell’s in Portland.

The commissioners, by the way, punted this “nexus” problem to a group called the National Conference of Commissioners on Uniform State Laws (NCCUSL). They’re supposed to “solve” it out of the light of day.

Before Gephardt or anyone else tries to feed you any more rhetoric, however, let me make one suggestion. Shine a bright light on the NCCUSL. Government tax decisions deserve the light of day.

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