Technology TransactionsIs It Time To Tax Online Sales?
With the federal government and many states now running at a deficit, it"s little wonder that local bureaucrats are eying the Internet as a potent source of new revenue. The idea is to tax online retail sales, not a bad thought when you consider that one alternative might be still-higher property taxes.
Given the unbelievable tales of Internet success (that is, tales which should not be believed), you might think that much of the economy has drifted online. That just isn"t the case, reason enough to expect more online mergers, strategic partnerships, and closures in 2003.
According to the U.S. Department of Commerce, the numbers for the third quarter of 2003 show that U.S. retail sales totaled $827.5 billion. Of this amount, e-commerce revenues reached $11.1 billion -- 1.3 percent of all retail sales.
For the year, figure that online sales will reach $40 billion -- about what Wal-Mart, by itself, takes in every ten weeks. Collect 5 percent of all online sales and assorted governments might then have another $2 billion in tax revenues.
But not so fast.
First, some online sales are simply cannibalizing traditional retail revenues. Instead of buying a coat at a local mall, you order online. In this scenario, online sales "increase," traditional retail revenues "decline," but there are no additional sales to tax because no additional goods are being purchased.
Second, when goods are sold locally collecting a sales tax is an established matter. This is not the case online: Under a 1992 Supreme Court decision, Quill v. North Dakota, to tax sales states must show that "nexus" exists: that is, that the retailer has to have a physical location within the taxing jurisdiction.
Third, Congress has said "no" to online sales taxes -- at least for the moment. The federal ban will continue until November 1st and could be extended.
What you have at the moment is a huge subsidy favoring online sites and harming local businesses. If I buy a shirt online I pay no sales tax. If I buy the very same shirt locally I pay the tax. The result is that consumers have an incentive to shop online. The great miracle is not that sales worth $40 billion or so were made online in 2002, it"s that the number isn"t far higher given tax advantages, hype, and other factors.
The real issue is not whether there will be or not be an online sales tax starting next November, but what will happen in the future -- say three to five years from now. By then, presumably, online sales will be far larger. If this is true, then the impact on traditional retailers will increase and state governments will be losing serious money.
If retailers online and off pay the same sales tax under the same standards, then the disadvantage now faced by local stores can be eased. That"s good for local stores, good for local communities and good for those who own commercial property. Rents are most-likely to rise when retailing sales and profits increase.
There is, of course, the thought that Internet retailing represents a "special case" worthy of preferential tax treatment unavailable to neighborhood stores. That may have been the case 10 years ago when the Internet as we now know it was just beginning. It might have been the case five years ago when online retailing was new and different. But today online retailing is an established option. Payment is quick and easy. Shipping is often free. Whatever case there may have been for online preferences has simply disappeared.
But what about the marginal results gained so far by online retailers. Isn"t the paucity of sales evidence that further tax breaks are required?
Not hardly. What the numbers really say is that the Internet sales have now emerged as a $40 billion industry -- that"s twice as much money as all U.S. radio stations generate
in a year, according to Robert J. Coen, senior vice president and director of forecasting with Universal McCann, one of the world"s largest ad agencies.
Online entrepreneurs wanted time to become established before paying retail sale taxes. Time"s up. Now let"s move on.
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