A tax-free Internet doesn’t mean an Internet free of taxes.
A battle is brewing in California, and elsewhere, over whether and how the state should tax sales on the Internet. In this state, attention is focusing on a bill to tighten up on sales tax collections from e-retailers.
Although there is a popular misconception that the Internet is tax-free, Rep. Chris Cox, R-Newport Beach, who co-authored the federal Internet Tax Freedom Act, made it clear that his legislation doesn’t prevent states from collecting sales taxes on the Internet.
“Our bill was to prevent the 30,000 municipalities from imposing new taxes on the Internet, such as a tax for accessing it,” said Cox this past week. “The bill doesn’t apply to sales taxes. That’s a completely separate issue.”
The act, passed by Congress in 1998, established a three-year moratorium on new or discriminatory taxes. Since the sales taxes are not new, the states still can collect them. The catch is that for the state to collect the tax, the company selling the product must have a brick-and-mortar presence in the state.
States can collect the sales taxes from the buyers. That’s a law that’s long been on the books, to apply to people who buy from catalogs. However, hardly anyone pays these so-called “user taxes.”
“The states have been unwilling to collect the user taxes. I don’t see that happening because everyone has constituents and they would be upset,” said Cox.
Business Targeted
Instead, what two California legislators are proposing is to clamp down on businesses.
Assemblywomen Carole Migden, D-San Francisco, chairwoman of the Assembly’s Appropriations Committee, and Dion Aroner, D-Berkeley, this year introduced AB 2412 to “level the playing field” among e-commerce retailers.
The pair said some firms are avoiding sales taxes by establishing e-commerce subsidiaries. The assemblywomen said other firms,such as Macy’s.com, REI.com, Wal-Mart.com, EddieBauer.com,are collecting sales taxes on their e-commerce sales in California.
“This bill would clarify that the processing of orders electronically, by fax, telephone, the Internet, or other electronic ordering process, does not relieve a retailer of responsibility for collection of the tax from the purchaser if the retailer is engaged in business in this state,” said the text of the bill.
Even though the California budget has a multibillion-dollar surplus, some state officials are worried that the Internet will cause a decline in revenue.
Tax Erosion Feared
One recent study by a legislative analyst predicted the Internet will cause “a steady erosion” in sales taxes, up to 4% annually by 2003. Sales taxes provide about a third of the revenue stream for both the state and city governments and a significant portion for county governments.
There is some opposition to AB 2412. Assemblyman Robert Pacheco, R-Walnut Creek, has introduced AJR 41, a resolution asking the federal government to resolve the matter. Pacheco said it’s a counter-measure to the Migden-Aroner bill.
“I find nothing fair about increasing taxes,” said Pacheco in a press release. “Their proposal probably violates existing federal law and various international accords and agreements that the United States government has entered into.”
Since Pacheco is in the minority party, his resolution is unlikely to go anywhere. And while on most tax issues, a two-thirds vote is needed to pass the Legislature,and thus Democrats would need Republican help to pass the Migden-Aroner bill,it is currently classified as needing only a majority vote, meaning Republicans would be unable to block it.
Cox said the issue of whether companies can avoid sales taxes through a subsidiary “is not an Internet issue.”
“That’s been a longstanding issue on what corporations can do and cannot do,” said Cox, who as chairman of the House Policy Committee, guides what policies the Republicans will pursue in Congress.
Thus far, Gov. Gray Davis has not indicated a position on the Migden-Aroner bill. He recently was quoted as saying, “In the short term, I do not favor the application of the sales tax for the Internet, because I certainly don’t want to kill the golden goose that is laying the egg.” n
