Taxman Has Interest in Internet Biz National Law Journal - March 16, 1998 States at odds with Clinton over moratorium proposal. THE SUMS ARE staggering: Americans bought $2.6 billion worth of goods over the Internet last year, according to a Yankelovitch Monitor study. When services are included, the total rises to $8 billion, says Forrester Research, of Cambridge, Mass. The numbers are only expected to grow. International Data Corp. forecasts that by 2002, Internet commerce will be a $220 billion industry. Forrester goes higher, to $327 billion in the next four years--if excessive regulation is not imposed. Because of the magnitude of the business, proposals to tax Internet transactions have begun to circulate. In late February, the National Governors Association voted to ask Congress to allow the states to impose a single statewide tax on electronic commerce, in both goods and services, sold over the Internet. "Many states have shifted from real-estate or property taxes to sales taxes as a main source of revenue," said Prof. Amelia Boss, an electronic commerce specialist at Temple University School of Law. "What the states are looking at [on the Internet] is the erosion of their tax base." President Clinton has voiced his support for the Internet Tax Freedom Act, or ITFA, S.442/H.R.1054, proposed by Sen. Ron Wyden, D-Ore., and Rep. Christopher Cox, R-Calif. The ITFA would impose a six-year moratorium on new taxes unique to Internet business; it has passed the House and Senate Commerce Committees and has been referred to the Senate Finance Committee, where its scope may be narrowed, predicted David Cowling, a partner in the Dallas office of Jones, Day, Reavis & Pogue, who advises high-tech companies on taxation issues. Some claim that the ITFA is too vague and, as a result, may have unintended consequences. According to the National Conference of State Legislatures, the bill could exempt software and Internet service providers from paying existing taxes, such as unemployment and property taxes, in part because these businesses can set up shop on a Web site in cyberspace, transact major business there that would be taxable if it occurred at the mall, but pay tax nowhere. Others, including the governors of California, Massachusetts, New York and Virginia, raise business rather than legal concerns, arguing that taxation may stifle this new market. "Any tax affects the behavior of consumers," noted Michael R. Young, of New York's Willkie Farr & Gallagher, who focuses on accounting and reporting issues. There are 30,000 state, local and federal taxing authorities. If every entity with the power to tax does so, then Web businesses, many of which are very small, face multiple, duplicative tax and reporting burdens. "Surely the businesses should be taxed somewhere," says Mr. Young. "The concern is that they not be taxed everywhere." Goods vs. Services Taxation of goods, as opposed to services, does not present a significant challenge, said Jones Day's Mr. Cowling. Many goods can be taxed in the same way mail- order catalogue purchases are handled. Under a 1992 Supreme Court decision, Quill Corp. v. North Dakota, 504 U.S. 298, customers do not pay sales tax on such purchases unless the company has a physical presence, such as a warehouse or a store, in the customer's state. Land's End, of Dodgeville, Wis., opened on the Web in July 1995. "Our Internet sales are small but growing," said Charlotte LaComb, manager of investor and financial relations. "We treat them just like our catalogue sales." It was only in September 1996, when the clothing company opened a store in Manhattan, that New Yorkers had to start paying sales tax on orders. Ms. LaComb said it is difficult to track lost business due to the new tax. Companies such as Land's End, with a clear situs, selling tangible property over the Internet, can be regulated under Quill. But Quill was not popular with many states, and the governors' proposal may be an attempt to legislate around the case, said one lawyer who requested anonymity, although the same jurisdictional issues could arise. But some Internet transactions are distinguishable from mail orders. Software might be downloaded rather than shipped. Information might be provided from offshore Web sites. These new intangible businesses do not fit comfortably into existing tax structures, said Mr. Cowley. Taxation methods were built around "widget businesses" involving the transfer of physical goods in specific locations, he notes. "The download of an intangible" is a transaction that states do not treat uniformly, he said, noting that software is taxed in Texas as tangible personal property. In the majority of states, software might not be taxed at all unless it is bought off the shelf. "Software is so complex that it's all over the map," he said. For example, Europeans proposed a "bit tax" on downloaded data, but the idea was short-lived, said Marcelo Halpern, of Chicago's Gordon & Glickson. William A. Tanenbaum, an intellectual property and technology partner at New York's Rogers & Wells, speculated on taxing information. "You can imagine a situation where you would pay one rate for live access to information, a lower rate for older information and a third rate for overnight delivery." Enforcement of such Internet taxation schemes could require enormous, 24-hour-a-day efforts, said Temple's Professor Boss. There may be wrinkles even with a tax on tangible goods purchased on the Web, if these goods are regulated, noted Mr. Cowley. "Guns, cigarettes, wine... state laws vary, and interstate shipment presents problems." The Internet has international tax dimensions, too. On Feb. 19 the U.S. proposed to the World Trade Organization that electronic commercial transactions be kept free of customs duties--establishing the Web as a "duty-free zone." It was the first time the WTO had addressed electronic commerce. * * *  This article is reprinted with permission from the March 16, 1998 edition of The National Law Journal. © 1998 NLP IP Company.   || About This Site || Articles || E-Filing Projects in the U.S. || || Lawyers in the Movies || Links || My Background || Humor || Home || E-mail wendytech@gmail.com