The tax-friendly status of online commerce and Internet access could be in jeopardy: legislators are beginning to warm up to the idea of taxing Internet commerce more consistently. Currently, merchants are obliged to collect state and local taxes only for sales to jurisdictions where they have a presence, or nexus.
In November, the Internet Tax Non-discrimination Act (formerly the Internet Tax Freedom Act), which made such Internet access services as America Online tax-free, expired. Further efforts by legislators to make the moratorium permanent have come under fire from cash-strapped states, clouding the act's future. (At press time, legislators were reintroducing the moratorium in Senate bill 150 and House of Representatives bill 49 in the hope of making it permanent.) So far, most states have not started to collect taxes on Internet access services, but experts say they could start if the moratorium is not quickly reinstated.
Meanwhile, an initiative to streamline sales-tax policies among states is gaining momentum. The Streamlined Sales Tax Project, a model law that would standardize definitions of taxable goods across states and limit each state to a single sales-tax rate, has been ratified by more than 20 states and supported at the federal level by bills proposed in both the Senate and the House. The initiative would nullify the central argument for not requiring online merchants to collect sales tax—that keeping track of all the tax laws of all state and local jurisdictions would be overly burdensome—opening the door for collection of the taxes.
"It seems inevitable that there will be more regulation coming to the Internet. It's only a matter of time before E-commerce will be taxed with more predictability," says Kate Delhagen, principal retail analyst at Forrester Research.
One reason the states are eyeing Internet taxes is that online commerce is growing. Estimates for 2003 put total online commerce in the United States at more than $100 billion. "It's starting to add up to real money," says Delhagen. "This is millions of dollars to some states that they are missing out on."