Q:If Congress extends the current three-year moratorium on Internet sales taxes that expires next year, what will it mean to Texas cities and businesses?
Oh, swell, a complicated tax debate. Quick, log on to www.drugstore.com and buy me some NoDoz. Wait! It turns out that Texas is deep in the heart of the current debate over whether Congress should extend the Internet Tax Freedom Act. The House has already voted to prohibit “new, multiple, or discriminatory” taxes on online transactions until 2006, but a posse of lobbyists from Texas has helped stall the action in a Senate committee.
Dallas mayor Ronald Kirk and Rice University president Malcom Gillis are national leaders in opposing the Internet’s exemption from new state and local taxes, which are used to support schools and local police and fire departments and build prisons and roads. They and other opponents of the moratorium say it is unfair to local merchants, who have to collect taxes while their online counterparts do not, and unfair to poor people, who typically do not have access to tax-free online shopping. Several high-profile technologists like Andy Grove, the chairman of Intel, have come out recently in favor of an Internet sales tax.
But for die-hard anti-tax Republicans like House majority leader Dick Armey, taxing the Internet is the equivalent of killing the golden goose. “I want to assure the fifty-five million Americans who shop online,” opines Armey on his Web site (of course), “that we are firmly committed to a tax-free Internet.” Governor George W. Bush has supported the current moratorium but has not taken a stand on extending it. That’s partly because he has conflicting interests. As governor, he has an interest in finding enough money for his law enforcement, education, and other key agendas, but as a candidate for president, he dares not endorse new taxes.
According to Texas’ chief deputy comptroller, Billy C. Hamilton, the state is indeed missing out on some $50 million a year in potential Internet sales tax revenues. But he also says that the loss has been overblown. “It’s not yet a life-and-death struggle on the razor edge of technology,” he says. The reason? Hamilton believes that Texas more than makes up for the “lost” revenue by attracting new Internet businesses and workers to the state.
But it’s not as though e-commerce is totally tax-free either. Though Internet taxes are state taxes, and state tax-collecting typically stops at the border, businesses still can be compelled to charge sales tax on large business-to-business sales. Texas-based companies can also charge sales tax in states where they have a physical presence. Since most of Dell’s customers are corporations, and since it has a presence in many states, it pays taxes on most of the $40 million a day it logs in Internet sales.
But consumers can often avoid Internet taxes. Texans, who spend more money on Internet purchases ($3.2 billion in 1999) than any other state except California, often buy things from out-of-state merchants, either over the Internet or by catalog. When they do, they are supposed to calculate a “use” tax and voluntarily send it to the distant state. (By law, states cannot force merchants in other states to collect and return sales taxes, unless the business has a physical presence in that state.) This use tax applies to every piece of software you download, every purchase from Amazon. com, every trinket from eBay. In practice, of course, no one pays it.
“But absolutely nobody is going to waste the time and money it takes to collect the $2.95 use tax on a book you buy from Amazon.com,” Hamilton explained. “On the little bitty purchases, the only person I know who pays the use tax is me. I’m the only one who is dumb enough, I suppose.”
It is reasonable to suppose that, unless Ron Kirk and Malcolm Gillis get their way, Hamilton will remain part of a small minority for the foreseeable future.