Q. Says here a lot of governors are upset about Internet scofflaws not paying the taxes they owe. Who are these bums?
A. Well, there’s Governor Leavitt of Utah, Governor Engler of Mich–
Q. No, not the governors! I meant who are the bums who aren’t paying their taxes?
A. You, for one.
Q. *Me?* What are you talking about? I pay my taxes!
A. Hey, is that the new Matt Drudge book I see on your desk?
Q. Yep, *Drudge Manifesto.* $18.36 at Amazon.com — just got it this morning. But don’t change the subject: Why are you calling me a tax scofflaw?
A. How much sales tax did you pay for that book?
Q. Sales tax? C’mon — you know there’s no sales tax when you buy online.
A. Exactly: That’s what the governors are griping about. They claim their states are losing billions of dollars a year because Internet sales aren’t taxed.
Q. Why don’t they just enforce their tax laws?
A. They’d love to. But the Supreme Court ruled years ago that states may not force companies outside their borders to collect taxes for them. That would interfere with interstate commerce — something the states, under the Constitution, may not do. The court said that companies only have to collect sales taxes for a state when they have a “substantial physical presence” in it or some “nexus” to it. The case was about mail-order catalogs, but Web sites are no different.
Q. So I didn’t owe any tax on the Matt Drudge book because Amazon.com is in Washington State, and I’m here.
A. Actually, you do owe the tax. But Amazon doesn’t have to collect it.
Q. I *do* owe it?
A. Yeah. You’re a scofflaw, remember?
Q. What am I supposed to do, send the tax on $18.36 — what’s that, 90 cents? — to the Revenue Department? That’s nuts.
A. Right on both counts: It’s technically what the law says, but you * would* be nuts to pay. And the Revenue Department would be nuts to come after you for such a tiny amount. So the money goes uncollected — a couple billion dollars this year — and the governors have something to get hysterical about. And not just governors. The National Association of Counties and the US Conference of Mayors are in a snit as well.
Q. I can see their point. They need the money and can’t get it.
A. Need the money? They’re rolling in dough! Last year the states ran a surplus of more than $30 billion! These politicians have more money than they know what to do with. But they talk as if they’re staring at bankruptcy. Ron Kirk, the mayor of Dallas, makes it sound like basic public services will collapse if he can’t tax Internet sales. “When you are sitting at home in your virtual world and . . . a fire breaks out, do you want us to send a virtual fire truck or a real big red fire truck?” The guy is shameless!
Q. OK, but you’ll admit that not having to charge sales tax gives online sellers a huge advantage over their competitors in malls and shopping centers.
A. I’ve got news for you: Web sales are just a drop in the commercial bucket. Of the $3.2 trillion in retail sales last year, e-commerce accounted for considerably less than 1 percent.
Q. But over time, Customers are bound to flock to a seller who doesn’t charge taxes.
A. Oh? How much did Amazon charge you to ship that book?
Q. Let’s see, I have the invoice right here. I paid — yikes! $4.48!
A. So who’s offering the bigger bargain? The no-tax Internet merchant in Seattle or the bookstore two miles from your house that doesn’t charge for shipping?
Q. I see your point.
A. Anyway, why *should* out-of-town Internet companies have to pay local taxes? They don’t benefit from local services. If there’s a fire in an Amazon warehouse, is Ron Kirk going to send Dallas firefighters to put it out?
Q. Well, there’s still one thing I don’t understand: If the states can’t collect sales taxes, why don’t they come up with an alternative? Some kind of Web-only tax — a levy on monthly Internet fees or a listserver tax or something?
A. They’d love to. But in 1998, Congress passed the Internet Tax Freedom Act, which created a three-year moratorium on taxes that target e-commerce.
Q. Three years? What happens when it expires?
A. Good question. A lot of people, including President Bush, want it extended. Representative Chris Cox of California has introduced a bill to do just that. But the governors and mayors, plus some of the big bricks-and-mortar retailers, want to trade an extension on the moratorium for a new law letting states collect sales taxes from Internet and mail-order companies.
Q. That sounds fair.
A. Fair to let every city, state, county, and school disrict take a bite out of Amazon? And every other dot-com? If you think high-tech is in shaky condition now, just wait until online sellers have to collect taxes for every sales tax jurisdiction in America. There are 7,600 of them! That would be a nightmare for even the biggest Web sites. It would kill the smaller ones.
Q. Then what’s the solution?
A. You don’t need a solution if you don’t have a problem. States and cities don’t need more tax revenues. Dot-coms don’t need new burdens. Customers don’t need higher prices.
Q. So Congress should just extend the ban on Internet taxes and call it a day?
A. Now you’re talking.
