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The Pizzo Files

The Taxman Has Designs on the Net

09/28/2000

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(23:18 mins)      (5.5 MB)

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Is the Internet a place unto itself, above the nasty little obligations like death and taxes the rest of us have to deal with? Well, if you ask the governors of most states, they're going to tell you, "No way, the Internet's days of skating by free while the rest of us pay the tab are over."

Or, at least, they'd like it to be over. The taxman has designs on the Net.

The latest attempt to breach the Net's tax shields came in the state that's arguably the capital of Internet commerce, California. That attempt failed when Gov. Gray Davis vetoed a bill that would have taxed any online vendor that also maintained a brick and mortar presence in the state. But it was a narrow victory for the Net's anti-tax forces.

The measure billed itself as a fine-tuning of the tax code. Not really a bill aimed at taxing Internet sales, just sort of plugging a loophole. But anti-Net-taxers were quick to paint it as the camel's nose in the tent, the thin edge of a wedge designed to pry open the Net to full taxation. Well, why not? Why should Net businesses be exempt from the same taxes brick and mortar companies have to pay?

Just before Gov. Davis vetoed the California bill, we talked to three experts who don't agree on this issue.

  • Hut Landon, the owner of Landon books in Mill Valley, California, is one of hundreds of independent booksellers who badly wanted to see the bill signed into law as a way to level the playing field by taxing competitors like barnesandnoble.com.
  • Rick Taylor is executive director of the Committee for a New American Leadership, a right-of-center think tank in Washington, D.C., started by Newt Gingrich back when he was Speaker of the House.
  • Gregory Turner is General Council for the California Taxpayers' Association.

During this conversation you will hear the three use the term "nexus." Nexus refers to a 1992 Supreme Court decision that was handed down in a mail order tax case. The court ruled that a company that has a "nexus" -- a physical store, warehouse, or sales facility -- in a given state could be taxed on sales made within that state. The California measure that was vetoed was aimed at companies like bookseller Barnes and Noble, which has bookstores in California and also conducts book sales on its Web site.

We begin with Greg, since this trouble began here in California -- as so many troubles do.

Turner: I guess there's one circumstance in which we hope that how California goes, the nation doesn't go.

Pizzo: Let's talk about that, because we're talking about some substantial money here. According to the most recent estimates that I saw published, by 2003, if Internet sales are not taxed, they're calculating that the states could lose up to $20 billion a year in tax revenue. It's a substantial amount of money.

Turner: I think that whenever you get into estimating the amount of potential revenue loss, you have to first question the source. There's no doubt that there is a pool of money out there that's not being collected, but it's not tax. It's not necessarily owed.

It's tax that the State is unwilling to go to the people who actually owe. We have both a sales and a use tax. It's not like the tax is not owed, it's a matter of who the State wants to go to to collect it. The State of course does not want to go door to door to every individual who actually does owe a use tax on stuff that they purchased over the Internet if it's taxable in the State. Instead, they want to try to go beyond their territory and force someone who's in another jurisdiction to collect that tax and remit it.

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