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To Tax or Not to Tax

The Writing’s On The Wall

Well it is not new that the US has always maintained that the Internet should be a tax free zone as per the US Congress’s Tax Freedom Act 1998 (authored by Representative Christopher Cox and Senator Ron Wyden and signed into law on October 21 1998 by then President Clinton) which following expiry continued to be reauthorized and its most recent re-authorization (legal speak for extension) was in October 2007 where this has been extended till 2014. It is unclear whether there will be another extension post 2014. There is a moratorium on new taxes on e-commerce, and the taxing of internet access via the Tax Freedom Act. Whilst the US Congress’s Tax Freedom Act 1998 bars federal, state and local governments from taxing Internet access and from imposing discriminatory Internet only taxes such as bit taxes, bandwidth taxes and email taxes, it also bars multiple taxes on electronic commerce. It does not exempt sales made on the Internet from taxation, as these may be taxed at the same state and local sales tax rate as non Internet sales.

New Bill in the House

With the introduction of the US Marketplace Fairness Act in 2013 in both the Senate and the House of Representatives will make for some interesting discussions and lobbying at the Hill. Whilst the Bill in its current form acknowledges the exemptions that are currently in place—the manner in which discussions play out by the manner in which both Senators and Representatives are having reflect a change in atmospheric pressure—which in my mind is significant.

In 1998 the US Senate voted 96-2 to approve the Tax Freedom Act and the mere fact that the new Bill has 28 Co Sponsors and in the House of Reps, there are 47 co sponsors is indicative of either a shift in paradigm or that State coffers are screaming to be filled.

The S.336 Marketplace Fairness Act of 2013 introduced on February 14 day, 2013 and sponsored by US Senator Michael Enzi [R-WY] There are 28 co-sponsors (21D, 6R, 1I).

There is a prognosis that the Bill might not get past the Committee and 0% chance of getting enacted.

The H.R.684: Marketplace Fairness Act of 2013 introduced on February 14, 2013 and sponsored by US Rep. Steve Womack [R-AR3] had 47 cosponsors (25D, 22R). There is a prognosis that it has a 28% chance of getting past the committee and 11% chance of getting enacted.

To Tax or Not to Tax

The term ‘electronic commerce’ (e commerce) means any transaction conducted over the Internet or through Internet access, comprising the sale, lease, license, offer, or delivery of property, goods, services, or information, whether or not for consideration, and includes the provision of Internet access.

As early as 2000, the problems of tax free e commerce was discussed during the first E Commerce Roundtable meeting in Washington D.C. If e-commerce proceeds untaxed, it would mean that state treasuries would face an eroding tax base. States within the United States of America rely on sales tax for approximately 25-40% of their revenue. As such there is a trade-off or opportunity cost as other taxes may have to increase to make up for the deficit caused by tax-free e-commerce.

The deficit caused by tax free e-commerce means that other taxes may be subjected to increase and also potential funding may be siphoned away from other priority areas. Traditional firms or businesses who do not trade electronically are at a disadvantage as they are forced to collect sales tax at the register. This is why it is sometimes cheaper to purchase a pair of boots online than if you were to walk into a traditional store.

One of the issues that was discussed in the E commerce round table meeting was the widening of the digital divide where people without credit cards or Internet access may be forced to shoulder the burden of sales tax.

E Commerce is blossoming

Global business-to-consumer e-commerce sales will pass the 1 trillion euro ($1.25 trillion) mark by 2013, and the total number of Internet users will increase to approximately 3.5 billion from around 2.2 billion at the end of 2011, according to a new report by the Interactive Media in Retail Group (IMRG), a U.K. online retail trade organization as reported by Internet Retailer dot com . The study estimates that business-to-consumer e-commerce sales in 2011 increased to 690 billion euros ($961 billion), an increase of close to 20% from a year earlier.

According to that study, the US remains the world’s largest single market as far as e commerce goes. The same study highlighted that with China’s phenomenal growth rates that it is speculated to surpass the United States in this regard shortly.

The US Department of Commerce reported that Total Retail Sales from the fourth quarter of 2012 was estimated at $1,105.8 billion which is an increase of 4% from the third quarter of the same year.

Only Time Will Tell

Whether the US Marketplace Fairness Act will eventually get passed and enacted is something that only time will tell but the timing is certainly interesting.

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Online sales have ALWAYS been subject to state and local sales tax. David Campbell  –  Mar 25, 2013 6:34 PM

The author seems to be confusing the ITFA with state and local sales tax.

ITFA prohibited new taxes on Internet access fees. ITFA did not prohibit states from imposing sales or use taxes transactions conducted over the Internet. Sales and use taxes are not discriminatory taxes since they apply to all purchases made by customers (mail order, Internet, out-of-state, home shopping, etc.) and taxes all goods purchased in the same manner.

All the Marketplace Fairness Act does is authorize states to compel out-of-state retailers to collect sales tax, exactly like local retailers are already required to do.

I did mention that the Internet Tax Salanieta Tamanikaiwaimaro  –  Mar 25, 2013 8:29 PM

I did mention that the Internet Tax Freedom Act “does not exempt sales made on the Internet from taxation, as these may be taxed at the same state and local sales tax rate as non Internet sales”.

You said the MFA "acknowledges the exemptions that are currently in place" David Campbell  –  Mar 25, 2013 8:42 PM

Not sure where that is coming from. Soon after that, the article implies some tectonic political shift, which I also do not think is under way. In fact, there is even a bill pending to make ITFA permanent.

ITFA and MFA are completely unrelated except that the internet involved - and it seems the article conflates the two matters.

Also, given the 75 to 24 vote of support in the Senate on Friday, the prognosis for the MFA should be revised, at least in the Senate.

Additional Thoughts Salanieta Tamanikaiwaimaro  –  Mar 25, 2013 10:03 PM

What I meant when I said that the Marketplace Fairness Act (MFA) acknowledges the exemptions that are currently in place is that as it is currently worded, States that don’t have Sales Tax will not be forced to collect Sales Tax. It merely imposes an obligation on internet retailers to collect Sales Tax from consumers who purchase goods online if they live in States that are obliged to pay Sales Tax.

Yes - the prognosis would have to be revised for the Senate following the 75-24 vote.

The Marketplace Fairness Act indeed raises an interesting consideration of survival of small businesses and the collection of existing sales taxes. I also enjoyed watching US Senator Durbin’s speech.

At the end of the day, policy makers and legislators will have to weigh in all the considerations and see how this ultimately affects the US economy and her people.

Anything involving taxation will no doubt be political. There is a tectonic political shift albeit subtle but only time will tell. One of the things that is important for policy makers is to factor in the impact on all stakeholders.

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