There is a seamy secret behind all the commercial hype and gee-whiz journalism about the E-commerce revolution: The Internet is America’s fastest-growing tax dodge.
And it’s a regressive tax dodge, to boot.
It’s the wealthier, better-educated folks who are buying computers, signing onto the World Wide Web and discovering–if they didn’t know already–there are no sales taxes on the Web. The realization is spreading that, for big-ticket items, you’re a fool to shop anyplace else.
So it’s the unwashed and unplugged who will keep slogging over to the Kmart or the corner store, shelling out that extra 5, 7, or in parts of Chicago, 9.75 percent, to keep the wheels of state and local government turning.
This doesn’t bother most of us, of course. Legal tax-avoidance is a skill of modern citizenship, up there with ducking jury duty and slipping grass clippings into the regular garbage.
But it’s becoming obvious, as more and more consumers wake up and smell the tax-free coffee, that America needs a new system for collecting sales taxes. (If not an entirely new system for financing state and local government.)
The average state gets about 40 percent of its total revenues from the sales tax. In Illinois, with its income tax, that sales tax percentage is “only” 26 percent of the general fund. Municipalities also are hooked on the sales tax. In fact, some of Chicago’s most successful suburbs (Schaumburg, Skokie, Niles) have been able to minimize other taxes by aggressively recruiting or annexing high-volume shopping malls, auto dealerships and discount chains. It’s a beggar-thy-neighbor game, but sales taxes have been hugely influential in drawing the metropolitan map.
Nobody knows how fast the E-shopping revolution will unfold or how deeply it will penetrate the marketplace. One recent study, by the Washington-based Center on Budget and Policy Priorities, predicts that, by 2003, states and cities will be losing as much as $15 billion a year in sales tax revenues. Think of it as 300,000 firemen and police officers each making $50,000 a year.
They’re being quiet about it, but officials who run states and cities are in a controlled panic. They want their existing sales taxes extended to the Internet, preferably at the expiration of the three-year moratorium Congress has invoked so as to determine what to do.
Meanwhile, the anti-taxation wing of the Republican Party sees in E-commerce a chance to accomplish, by inaction, what they failed to do earlier this year thanks to President Clinton’s veto of their proposed income tax cut.
All this is being played out on an obscure bipartisan panel of experts called the Advisory Commission on Electronic Commerce. Their upcoming recommendations, and the congressional reaction to them, promises to be one of the hottest political shows of the new year.
The way it stands now, one faction on the commission (the one appointed by Republican hardliners) wants to permanently bar sales taxes from the Internet. This faction is led by the panel’s chairman, the conservative Gov. James Gilmore of Virginia, who is said to be eying a run for the U.S. Senate. Gilmore’s most voluble ally is Grover Norquist, president of something called Americans for Tax Reform. The Gilmore/Norquist faction is being egged on by congressional hardliners such as House Majority Leader Dick Armey and Majority Whip Tom DeLay. They say any extension of sales tax to the Internet would be a “new” tax and therefore unacceptable.
The other faction, which sees itself as trying to level the playing field between real stores and E-stores, is led by Michael Leavitt, the Republican governor of Utah and chairman of the National Governors’ Association. “We all despise taxes,” Leavitt says “but if we have to have them, they must be fair.”
Earlier this month the Leavitt faction floated a proposal drawn up by a coalition of local and state tax administrators from 33 states. It calls for a ban on Internet-specific taxation (on bytes, bits, hookups, etc.) but would extend existing state and local sales taxes to Internet purchases.
A big problem for the Leavitt faction is that there’s no simple way for Internet retailers to compute and impose taxes on behalf of the 7,000-plus localities that impose them (at various rates and with various exceptions.) So they’re calling on somebody–they don’t say who–to develop the necessary software, and on all the tax-imposing governments to agree on a minimum level of standardization. Moreover, as a sop to the anti-tax captains of E-commerce, Leavitt would assign the entire tax collection effort to a new kind of cyber-business called “trusted third parties” or TTPs. (The TTP, which would keep a portion of the tax as a fee, could be a bank, or a credit card company or a collection agency chosen by the cyber-seller.)
This sounds a bit far-fetched, but then I’m still struggling with back-slashes and tildes.
My guess is the Gilmore/Norquist faction has bullied the Leavitt faction into an apologetic mode. As in: “Don’t worry, Mr. E-tailer. We’ll have this new kind of company collect the taxes so you won’t have to.”
But why the kid gloves? E-tailers are retailers, just like the stores at the mall. And like the stores at the mall, they should be required to collect taxes from customers who are supposed to pay them. So get on with it. They’re geniuses these E-tailers, or so we’re told. They’ll find a way to collect what’s owed the commonweal. Or else.
