The lifting of the moratorium on the taxation of Internet purchases and services, which will happen in October, could create confusion in an e-business environment already in upheaval, says a faculty member in Temple University’s Fox School of Business and Management.
“Trying to assess taxes on Internet purchases is going to be a very tricky thing,” says Dr. Hope Schau, an assistant professor of marketing and an expert in e-commerce. “You’re going to have a lot of lawyers trying to figure out where to assess these taxes. Is it where the company is legally incorporated? Is it where the warehouse is located? Is it where the customer is shipping to? Or is it where the billing address goes to? “In all of these issues, the question is, where is ‘there?’” she adds. “The problem is, there is no ‘there.’” The reason, explains Schau, is most e-businesses or dot-coms, unlike their brick-and-mortar counterparts, are virtual places, with warehouses in different regions.
Schau points out that catalogue sales, which also operate in a multi-tax entity setting, may become a model for the taxation of online sales. “You have companies sending catalogues to various states and these companies all have call-in order centers and warehouses located in different regions, which is somewhat similar to the e-marketplace,” she says. “The key difference is that e business is more dynamic than the catalogue marketplaces we have seen, because many online products are not tangible--they-re e-services like Web site maintenance or customer relations management.”
Schau says that taxing Internet purchases will also eliminate one of the biggest competitive advantages e-firms have. “E-businesses are able to sell at lower prices and offer things like free shipping because it’s tax-free shopping,” she says. “That’s a major part of what makes shopping online so attractive--lower prices and no taxes. “Now, e-firms may have to pay taxes to different entities,” she adds. “It’s going to change the way e-businesses are operating.”
With a lot of the dot-coms already suffering, Schau says taking away a major competitive advantage over their brick-and-mortar competitors couldn’t happen at a worse time. “In California, it’s seven percent less to buy online than it is to buy in stores because there are no Internet taxes,” Schau points out. “If those cost savings by the consumer go by the wayside, people may not have the same incentive to buy online.”
The moratorium on Internet taxes is set to expire in October. A U.S. House of Representatives panel voted Aug. 2 to bar states from taxing Internet access and extend for five years a ban on other Internet-specific taxes, declining to approve legislation that would help states tax online commerce.
However, 40 state governors have drafted a letter to Congress urging a rejection of the ban on e-commerce taxes. Instead, they propose a policy allowing the states to develop an initiative to tax online sales.
Under a 1992 Supreme Court decision, states cannot require out-of-state retailers such as catalog companies to collect sales taxes unless they have a physical presence in the state. Many state and local officials fear a loss of revenues as constituents increasingly shop online, while Internet retailers say it would be impossible to comply with the maze of state and local tax codes across the United States.