Just finished the cover story of this week’s Time Magazine (“Kiss your mall goodbye”) on the explosive growth of on-line shopping. Pretty impressive stuff–the idea that shop-by-Internet sales are doubling every few months as sellers and buyers of just about everything take their business to the Web. But I still can’t believe Time missed the story. Or what, to me, ought to be a big part of the story.
If, as the writer says, we’re at the dawn of a New Age in which people will use personal computers “to get whatever we want whenever we want it,” then who’s going to pay for state and local government?
OK, so not many folks lose sleep over the fiscal problems of their cities and suburbs, their regional transit authorities and state agencies. That’s probably why the editors at Time decided not to add a sidebar about what cyber-shopping is doing to sales taxes. Sales taxes account for a third of the State of Illinois’ tax revenues and a fifth of the City of Chicago’s. Or what electronic retailing means, over the long haul, for local property taxes, a handsome portion of which are paid now by the stores that anchor this country’s Main Streets and soon-to-be-kissed-goodbye shopping malls.
No, the abandonment of stores isn’t going to happen overnight, maybe not at all. On-line sales, for all their spectacular potential, are still less than 1 percent of all retail sales. Some people will never use the Web to buy anything. Others will use it to buy certain known quantities (a best-selling book, say, or a highly rated VCR) but they’ll still want to try on the pants before handing over their Visa card.
Big savings, however, is a powerful persuader. (The combined sales tax in Chicago, for instance, is 8.75 percent.) And as Time points out, you can tell Peapod.com how ripe you want the bananas and Peapod will deliver them to your door. You can even bid on a plane ticket to a distant city (Priceline.com) in hopes an airline will sell you one at that price. Call it market transparency, or disintermediation, or whatever you like. The business of retailing is changing and changing fast.
As it stands now, cyber-sales outfits are subject to the same state and local sales taxes as mail-order companies. This means, according to the last U.S. Supreme Court ruling on the subject, that if the seller has a physical “nexus” in a state (a store, a warehouse, a distributor) then it must collect state and local sales taxes from its customers there.
Not surprisingly, the emerging cyber-marts, such as the Seattle-based Amazon.com, a wholly electronic bookseller, are careful not to establish a nexus anywhere but at their headquarters. Even store chains like Borders Books & Music have set up “sister” companies (Borders.com) that claim no Illinois nexus. The little bookstore down the street, well, it’s collecting sales taxes, paying property taxes, employing local citizens . . . and getting clobbered.
In a better world, a national protocol would be set up so people would pay sales taxes not according to their method of purchase, but where they live, which is to say, at the level their elected representatives have determined. But these being the self-indulgent, tax-o-phobic ’90s, nothing so rational is about to happen.
Rather than help states and cities stem the loss of taxes, Congress is about to compound the problem by passing something called the Internet Tax Freedom Act. Different bills are percolating through House and Senate Committees, but even the most benign would forbid states and cities, at least for the next three years, from imposing any new taxes on Internet sales or services. Existing sales taxes are supposedly not affected, but thanks to the lack of “nexus,” most cyber-sellers don’t pay them anyway.
Then there’s the questionable tax status of electronically delivered software, or music, or movies, or, for that matter, Internet usage itself. Are they all to be exempted from state and local taxation? And if an Internet message or service is not subject to such taxes, why is a telephone call?
Perhaps they all should be exempt. Nobody wants to stunt the growth of a new medium that is helping to power the economy and the stock market to record highs. Perhaps the act of buying and selling, of communicating and exchanging information, has become too subtle, too free, to accurately measure and tax. Perhaps. But what is to be taxed in its place? Techno-revolution or no techno-revolution, the prisons still need to be guarded, the roads repaired.
In Washington there’s Nero-ism in the air. The House recently passed a bill abolishing the entire federal income tax code by 2003. Oliver Wendell Holmes oft-quoted dictum that “taxes are what we pay for a civilized society” probably couldn’t get out of committee.
The one responsible feature of the proposed Internet tax moratorium is its likely creation of an advisory commission that will recommend what to do about cyber-taxes.
My unsolicited advice: Either replace sales taxes altogether (with an income tax increase or a value-added tax that could be rebated to states and locals) or force cyber-retailers to pay the same as they do on Main Street and at the mall.
If Congress plays Santa Claus and lets the Internet evolve as a huge tax dodge, the damage to America’s local communities, city and suburban, will be immeasurable. They wouldn’t let that happen, would they?
