The Internet will simplify a lot of things in life, but don't count on the country's unwieldy tax system being one of them.
When California passed a law last week banning new taxes on Internet services, it raised the volume on a tax policy debate that pits virtual businesses against Main Street merchants. Lawmakers and industry experts have predicted the growth in online commerce could cause mass confusion among the country's 30,000 tax jurisdictions.
"If the Internet is going to grow, it ought to be because of the advantages in the way it delivers goods, not in the way it is taxed," said Utah Governor Michael Leavitt, head of the National Governors Association task force on Internet development.
It is not hard to understand why California was so willing to forgo potential tax revenue on one of its most successful industries. Internet companies in and around Silicon Valley have generated jobs and a level of affluence that have all but erased any memory of the last recession.
"We certainly have more at stake here. We have the largest computer industry in the country," a spokesman for Governor Pete Wilson said after the governor signed a three-year moratorium on sales tax and other state levies for Internet businesses.
Although the federal government is leaning toward a policy that would block new online taxes for at least two years, the states are lining up on opposite sides of the issue.
Nine states already tax Internet services, as do some local governments. California was the sixth state to pass a law limiting online taxation, arguing that the Internet is a source of economic growth that should not be inhibited.
In the borderless world of cyberspace, conflicting tax laws pose some tricky problems: At best, state governments fear that Internet tax breaks will give an unfair advantage to online merchants. At worst, it would advance the so-called "digital divide" between the technology haves and have-nots, by imposing more taxes on the people who do their shopping in stores.
State governments, which have complained for years about the tax revenue lost in catalog sales, say the losses could multiply on the Internet. The National Governors Association estimates that state tax coffers now lose $3 billion to $4 billion a year on mail order sales to out-of-state merchants.
For example, when Leavitt recently ordered a book from online retailer Amazon.com Inc., he was not charged a tax. Since online retailers now abide by the same tax laws as mail-order catalogues, they only tax sales in states where they have a physical presence. The exact same book purchased in Leavitt's local book store would be taxed.
"That doesn't make any sense at all," said Leavitt. "Sales taxes are not a tax on businesses, they are a tax on people who purchase."
Jupiter Communications projects total online shopping revenues, excluding cars and real estate, will top $37 billion in the United States by 2002, up from $5.8 billion this year.
"There are significant dollars at stake and I think the states are going to kind of be forced to come to an agreement as to a new tax policy," said Jupiter analyst Ken Cassar.
New uses for the Internet threaten to further cloud the issue. Take, for example, Internet telephony, which allows phone calls to be transmitted over the same lines that deliver Web access. Should those businesses be allowed to operate without taxing consumers while regular phone companies cannot?
Many of those who work for Internet business argue it is not the government's place to protect older industries that are threatened by emerging technologies.
"The Internet is clearly going to hurt a variety of channels, including brick-and-mortar retailers," said Jerry Kaplan, president of the online auction house Onsale Inc. in Menlo Park Calif. "The less efficient operators are going to lose and the more efficient will win. We could have enacted laws to protect blacksmiths when the automobile came into effect, but I think, in retrospect, everyone would agree that would be counterproductive."
