It's Back to the Future for Internet Taxation

[Dave Farber <dave () farber net>]

------ Forwarded Message
From: Michael Geist <mgeist () uottawa ca>
Date: Tue, 25 Mar 2003 14:04:48 -0500
To: dave () farber net
Subject: It's Back to the Future for Internet Taxation

Dave,

Of possible interest to IP - my latest Law Bytes column in the Toronto Star
on the momentum toward Internet taxation and how we've seen this all before.

MG

<http://shorl.com/bikurifrimusto> [Toronto Star]

Fairness says it's time to tax goods sold online

MICHAEL GEIST
LAW BYTES
To those following the Internet taxation debate, the story smacks of déjà
vu.

In the months following a war, U.S. governments begin to express concern
about millions in lost tax revenues stemming from consumer purchases from
out-of-state retailers who do not collect local sales taxes.

The governments argue that the tax avoidance is particularly problematic
since it creates an unfair playing field that places local businesses at a
competitive disadvantage when compared with their counterparts in non-taxing
jurisdictions.

In response, the governments pass legislation requiring all sellers to
report their monthly out-of-state sales to tax authorities. The new rules
are designed to ensure that all sales are subject to local sales taxes.

While many expect precisely this scenario to unfold in 2003, this is
actually a story from 1949. That year, the U.S. Congress, alarmed at the
losses in tax revenue due to the growing popularity of tobacco sales via
mail order, enacted the Jenkins Act.

The much-neglected statute, which remains in effect today, requires tobacco
retailers to disclose their out-of-state sales to the relevant taxation
authority.

Technology may have changed dramatically since 1949, but the policy choices
surrounding sales tax and its collection remain largely the same.

Today, tax authorities throughout the United States and Europe are rapidly
abandoning previous policies that rendered the Internet a "duty free zone"
in favour of online tax approaches that mirror those found offline.

During the dot-com boom of the late 1990s, Internet taxation was viewed with
considerable skepticism. Internet self-regulation was the preferred approach
and with it came a hands-off approach to taxation.

Moreover, with e-commerce promotion enshrined as a key policy position,
governments were loath to stifle e-commerce growth with the burden of tax
collection.

The U.S. government led the way in this regard, enacting the Internet Tax
Freedom Act in 1998. The statute prohibited the establishment of new
Internet taxes for three years and was subsequently renewed in 2001.

Just as the dot-com boom has turned into a dot-com bust, however, so too has
Internet tax policy undergone a significant reversal.

Although many in the U.S. Congress remain supportive of the ITFA, dozens of
U.S. states have shifted toward a pro-Internet tax position.

This shift comes as little surprise since unlike the states, the U.S.
federal government does not levy a sales tax and thus its revenues are
largely unaffected by Internet sales.

In recent weeks, states such as California and Massachusetts, previously
strong supporters of a no-tax position due to the importance of the tech
sector within their states, have taken a sober second look at their budget
deficits and then taken the first steps toward implementing state-based
Internet sales taxes.

Moreover, more than 30 states recently reached agreement with several large
online retailers, reportedly including Wal-mart and Toys R Us, whereby it
was agreed to absolve the retailers from any liability for tax not
previously collected on Internet sales, in return for levying sales tax on
all future sales.

Tax courts in the U.S. have also shown a willingness to pursue tax claims
against online sellers. For example, a California board recently ruled that
online retailer Borders.com was required to collect sales tax for its sales
to state residents.

The board reasoned that Borders.com was sufficiently tied to the state that
it should collect sales tax since it offered customers the right to return
their online purchases to its offline stores.

The European Union has been similarly aggressive in pursuing a new Internet
tax policy. Commencing on July 1st of this year, the EU will require non-EU
companies selling digital products via the Internet into the EU to collect
Value Added Tax (VAT) on behalf of EU member countries.

While U.S. interests have argued strongly against the measure, the EU points
to simple tax fairness, noting that the current tax-free position enjoyed by
non-EU companies places them at a competitive advantage over their European
counterparts.

For example, Freeserve, a large U.K. Internet service provider has long
argued that it has been placed at a disadvantage relative to AOL, a major
competitor, since it is required to collect VAT from its subscribers, while
AOL does not.

Lost in the rush toward Internet sales taxation is a Canadian policy that
seems stuck in the 1990s. Last year the Canadian tax authorities released
guidance on GST collection for e-commerce sales and largely refrained from
adopting the more aggressive positions found in Europe and at the U.S. state
level.

While no one likes paying additional tax, the move toward equalizing online
and offline tax policy is to be welcomed.

First, it affirms longstanding notions of tax fairness that dictate the tax
policy should be consistent.

Second, it represents another step toward the continuing maturation of
e-commerce.

For e-commerce to be taken seriously as a critical part of the economy, it
must offer more than just a better deal on tax.
------------------------------------------------------------------------
Michael Geist is a law professor at the University of Ottawa and technology
counsel with the law firm Osler Hoskin & Harcourt LLP. He is online at
http://www.lawbytes.ca and http://www.osler.com (mgeist () uottawa ca).
-- 
**********************************************************************
Professor Michael A. Geist
Canada Research Chair in Internet and E-commerce Law
University of Ottawa Law School, Common Law Section
Technology Counsel, Osler, Hoskin & Harcourt LLP
57 Louis Pasteur St., P.O. Box 450, Stn. A, Ottawa, Ontario, K1N 6N5
Tel: 613-562-5800, x3319     Fax: 613-562-5124
mgeist () pobox com              http://www.lawbytes.ca

BNA's Internet Law News - http://www.bna.com/ilaw
Toronto Star Law Bytes columns at http://shorl.com/derakoprutapu
Internet Law Text - http://www.captus.com/Information/inetlaw-flyer.htm
Canadian Privacy Law at: http://www.privacyinfo.ca
ICANN UDRP Info at http://www.udrpinfo.com
ccTLD Governance Project at http://www.cctldinfo.com


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