Commentary: A First Step To Net Taxes

With only eight months before it must present its recommendations to Congress, the national commission on Internet taxation seems to be sputtering like a Web site with a bad server. The commission can't bridge the gap between conservatives who want to keep the Net tax-free, state and local governments that covet its revenue potential, and E-businesses that are willing to collect taxes--as long as it's made easy for them.

The panel's next session is set for Sept. 14-15 in New York. Even its chairman, Virginia Governor James S. Gilmore III, isn't sure the group will ever agree on whether Net transactions should be taxed at all. "I can't assure you of consensus," he told BUSINESS WEEK. "It may be that making the case for each side and presenting it to Congress is success."

Translation: Gridlock ahead. But the attempt to wrestle the tax issue to the ground is yielding one development. Most commission members agree it's important to simplify state and local sales taxes. Cleaning up those laws could make it possible for states to require out-of-state sellers to collect the levies. It would make life easier for remote sellers, including both mail order companies and online businesses. And it might even pave the way for a deal on the overall question of taxing the Net.

Today, states can't require remote sellers to collect tax because, in 1992, the Supreme Court ruled those activities were too onerous. Why, the court said, should a business in Delaware have to keep track of arcane tax rules in, say, North Dakota?

MARSHMALLOWS. The court asked Congress to fix the problem. That never happened. Instead, the rules have gotten even more complex. For instance, in New York, big marshmallows are taxable, but little ones are not. Why? Big ones are considered candy, but little ones are food.

A new study by Ernst & Young, sponsored by a business group called the eCommerce Coalition, highlights the problem: It reports that collecting sales taxes in multiple states costs large remote sellers--companies such as Inc.--8% to 14% of the amount of tax they collect. Small retailers may pay nearly as much in administrative costs as they do in taxes.

Governors have already agreed, in principle, that each state should impose a single tax rate for E-commerce, rather than permitting cities and counties to set their own rates. By late September, the National Governors' Assn. hopes to draft a model state law intended to trim much of the complexity from the current patchwork system, including common reporting standards. Technology may also make the task easier. New software enables sellers to determine instantly where a buyer lives, whether a product is taxable, and what the rate is.

But there is a trade-off. If governors and mayors do simplify their laws, a major objection that E-sellers have to the levies will evaporate. They have said that all they want is fair and equal treatment under state tax laws. Simplification would go a long way towards giving it to them.

Before it's here, it's on the Bloomberg Terminal.