Resistance is futile

by Scott Bradner

It is not a question of if you will pay taxes on the things you purchase over the Internet, it's only a question of when.

Last year the US congress passed the Internet Tax Freedom Act that provided a moratorium on the imposition of new taxes that single out electronic commerce or Internet access. The bill, like many in congress, as a misleading title since it set up a commission to make recommendations to congress on how to tax Internet-based commerce. The charge was not worded quite that way, it sounded more neutral about imposing taxes on Internet sales, but the reality of sharply increasing sales over the Internet is that taxes will follow.

The problem (a problem from the point of view of the 30,000 or so taxation authorities in the US) is not a new one. About $4 billion is "lost" in tax revenues each year through the ground rules that the Supreme Court has imposed on mail-order sales. Lost to the taxation authorities does mean found by consumers. At only about $170 million, the Internet-related tax losses are currently inconsequential. But these losses are expected to grow dramatically over the next few years. The US commerce department projects a loss of $17 billion annually by 2002 and a survey prepared by local government leaders projects a loss of $1.25 trillion by 2003. I guess the local leaders are even more bullish on the 'Net than us geeks.

Mail-order and Internet-based sales present some of the same complexities to those who would tax us. If I'm sitting in my house in Cambridge Massachusetts and place an order with LL Bean, officially located in Maine but which is using a phone-bank or web page located in Oklahoma ad pay with a credit card which has a corporate headquarters in New York and a data processing center in Connecticut, and the product is shipped from a warehouse in Georgia, just who should get what revenue if this transaction gets taxed?

The problem is not made any easier by the international nature of the Internet. Trying to reconcile different types of taxes across national boarders adds to the fun.

The commission met a few weeks ago and it was clear from the opening remarks that the commission members expect to figure out a way to tax the 'Net. The clearest results of the 1st meeting were that any taxes had to be easy for the consumer and taxing authorities to understand and that any taxes must not discriminate against 'Net-based sales. While it's not in their mandate I would not be all that surprised to see the commission include mail-order sales in its recommendations.

This is a very hard problem but I fully believe in the ingenuity of the government when it comes to imposing taxes. We will be paying these taxes soon.

disclaimer: Harvard revels in tackling hard problems with ingenuity but the above is my prediction.