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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.
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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Pizzo: We have at least twenty-five states now that have joined onto this streamlined sales tax initiative. The governors of these states are not going to give up on this, that's very clear. They're going to try to find some way to tax the Internet and one of the ways that they're trying to make this acceptable and easier to administer is to come up with some sort of streamlined sales tax across all of these different states. Rick, how does your group feel about this?
Tyler: I find it very interesting, a lot of the language that's used. "Loss of revenue" -- you have to say, if there's a loss of revenue -- you have to ask yourself, whose money is it anyway? It's the taxpayer's money. It's not somehow the government's money that the taxpayers are cheating the government out of, but in fact, it's their own government. Then you have this scenario where you have the taxpayer versus the government. I think that what the governors have proposed, and they say that it's voluntary -- and it occurs to me that if it is voluntary, and the companies decide to participate in collection of the tax -- it seems to me that I would go on-line and ask the company before I purchase this product, are you voluntarily going to tax me, or not? Because if you aren't, then I'm likely to buy the product, and if you are, I'll just go to a competitor who is not voluntarily taxing.
So it seems to me that the scenario they have is flawed unless they make it compulsory. I'll just remind you of what happened in Europe when they decided to streamline taxes. They did in fact streamline taxes, and everybody's taxes uniformly went up.
Turner: Let's make no bones about it. The states have no interest in simplification for simplification's sake. The concept of the simplified sales tax system is a ruse. If you've seen any of the draft languages come out of their working group, they're expanding, not just taxes extra-territorially so that one state can implore someone in another state to collect taxes from another state on their behalf, but they're actually expanding the base of what's subject to taxation.
Pizzo: Now we've heard two positions against this tax. I'd like to hear some observations on the other side of this issue, and we have Hut Landon, an independent bookseller in Mill Valley, California, who supports the California law. Hut, do you want to talk a little bit about why?
Landon: Well, the particular part of the law that we support and would like to see enforced is the part of the law regarding retail nexus. I'm not speaking about expanding the Internet broadly.
In California we face a situation where existing tax code law in our opinion is not being enforced by the Board of Equalization. There's a bill on the Governor's desk that does clarify it, and we hope that it passes, because right now we have companies in California who are collecting sales tax because they believe that they do have nexus. They have a retail location, and they have a web site that is selling to California customers and is selling, under virtually the same name, the same products, and are cross-promoting -- all of which are characteristics of nexus to the state. We have some companies, notably two major bookstore chains which affect us, who are not collecting, and we feel that that's wrong -- and it's merely a fairness issue.
One of the things that bothers us is that some people have tried to characterize our bill as an expansion of taxes and of new taxes. In our view we're trying to plug the dam and recoup lost taxes that are being lost to these companies who are dodging the existing law.
Pizzo: And it's a competitive issue, right?
Landon: Well, certainly it is. Barnes and Noble and Borders have, right off the top, anywhere from, depending on where you live, six to eight or nine percent advantage right off the bat by not collecting those taxes.
Pizzo: You've got these existing brick and mortar businesses who've been good citizens, maintaining our streets and highways all these years, and you've got these new kids on the block who come sashaying in here with pockets full of EC money, and you give them a pass, giving them a competitive advantage over these established businesses. Where's the fairness in this issue?
Turner: I think that the question goes back to the one of jurisdiction. I think it ultimately gets back to the fact that we're working off of a sales tax system that was created in an industrial economy, in which borders meant something, in which people did not travel interstate that often, particularly to buy consumable goods, and we're working off of a Federal constitution that says that states can't tax those people who don't operate within their borders. We're struggling with trying to make those work.
I think it's an easy argument to make that the Internet sellers aren't subject to tax, but in fact, they really are. I mean, they are paying taxes. The simple question is whether or not they should be obligated to have to collect and remit a tax to a jurisdiction in which they really don't have any presence. And that's really what it really comes back to.
When you're talking about nexus or presence, you're talking about the commerce clause, the founding fathers' belief that the states shouldn't be permitted to tax those people who aren't within their borders or who aren't doing business in there.
Pizzo: But I just bought a book yesterday from Amazon.com. Now, I know that they ship them out of a California warehouse. ...
Turner: Actually, if you're in California, they ship out of a California warehouse. That person is considered a dropship. There's going to be some obligation on the dropshipper to pay that tax. Are you talking about who the warehouse is owned by? If it's owned by Amazon or not? And if it's owned by Amazon, I would think, in that circumstance they would have nexus.
Landon: Yes, they would, we believe, and that situation, the nexus law, right now is a little bit trickier with regard to warehouses as opposed to actual retail locations. But I have to say there is no way you can say that because barnesandnoble.com happens to have corporate offices elsewhere that they don't have a presence in California.
Turner: The tax code has long recognized that corporations exist in a myriad of different forms. They have recognized that one corporation, even though they may be related, is a separate entity for purposes of applying the tax code. Current says that, and we have a Court of Appeals decision that essentially, in California at least, says that exactly what the Migden Bill is doing is unconstitutional and violates the commerce clause, because you are essentially forcing a corporation that has no presence in California to collect and remit.
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Landon: It's too long a discussion to get into, but I disagree. The current case is not the same as this particular situation, in my view. It's something -- whereas -- the legislative analyst disagreed with that when he looked at the Migden Bill.
Turner: The BOE's own attorney said just the opposite of that. I know lawyers can disagree on stuff, but there's certainly that question that's going to be out there--
Landon: Yes, but a legislative analyst had nothing to gain or lose from this, and so presumably it's reasonably unbiased. In fact, they're looking at whether they are doing something that might put the State in the situation of having a lawsuit brought against them. In his view, this was not -- this was just clarifying existing law.
Tyler: Let me make some observations here. I think that it's interesting that the Internet tax debate has produced an opportunity where businesses are actually asking government to tax other businesses so somehow that would level the playing field. To me that's sort of, somewhat unprecedented. The businesses that are brick and mortar stores -- which have every opportunity to also sell their wares online -- what the businesses should be calling for is to get rid of the sales tax that the brick and mortar stores should collect.
The Internet companies, they all do pay taxes. Wherever they're located, they pay property taxes. If they have trucks, then they pay the regulations, the fees, taxes. They pay payroll taxes, they pay workers' compensation taxes. They pay lots of taxes, and all their employees who go out and buy things, they all pay taxes, and they pay income taxes, presumably in California as well.
So it's sort of a myth to say that these companies aren't paying taxes. They are paying taxes. But let me speak to the competitive issue, because this is reasonably interesting to me because I recently purchased a television and VCR.
Now, for both items I actually went to a brick and mortar store, and I did most of my research online. I ended up buying the television at a local retailer after I'd researched it online and found out that this was indeed the best TV for the best price that I could buy, and I went and picked it up. My wife, child, and I are gladly watching a beautiful color TV at home right now.
I ordered the VCR the day before I picked up the TV, which was about fourteen days ago. I didn't pay tax on the VCR, but I still don't have it. It hasn't arrived yet.
With the TV, I did a whole series of things for which I paid a tax, and for the VCR I didn't. What I didn't do with the VCR is, I didn't get in my car. I didn't start it up, I didn't burn fossil fuel all over northern Virginia. I didn't speed, so I didn't need to have law enforcement keep track of my speeding. I didn't get in a horrific accident where the local fire and rescue had to come and rescue me. I didn't tie up traffic and I didn't wear out the roads. I didn't park in their parking lot. So, there's a whole series of services that I didn't use to buy the VCR, so in a sense, not only did I not pay for them --
Landon: But what about the UPS truck that does deliveries that doesn't do any of these things either?
Tyler: Of course they do, but UPS pays taxes. They pay dearly to use the roads. They pay dearly on business taxes.
Landon: Yes, but they're doing an extra stop to you. And to say that you're not using the services --
Tyler: It's far more efficient for UPS to go and collect all the items and then to deliver them in one truck than it would be for all the millions of consumers to go out and do the same thing.
Turner: This is a great example because I think that what it illustrates is the dichotomy. Because the problem with what the proponents, I think, are suggesting is happening is not that when you purchase the VCR or TV, you already paid taxes in northern Virginia for all of those services you're getting. It's the out-of-state company that's the one selling to you that they're somehow saying are doing business in the state. If that company is the one that's supposed to be collecting and remitting the tax on behalf of Virginia, what precedents do they have in Virginia to warrant the extra territorial tax?
Tyler: That's precisely the point.
Turner: Is it merely being on the Internet that's sufficient for you to have to pay taxes? Not just in California, Nevada, or Florida -- what happens here is going to happen globally. You've got to do this for California and Florida. The Europeans are going to want you to do it for them. Everybody in South America, Canada, and everywhere else --and pretty soon, in order for you to sell on the Internet, you're going to have to collect and remit, not just everywhere in the United States, but globally. Isn't that going to be a great impedance to the growth of commerce?
Tyler: I don't think it would actually work that way. I think actually companies, if Gray Davis signs the bill of the law, would consider moving up to Oregon. Then, if it becomes a national thing, companies would decide to move right across the border and then continue to do business and not pay the tax.
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Pizzo: There's all kinds of contradictions. This is one of those political issues that sort of finds strange bedfellows and finds conservatives, for example, in this case on the side of an issue they're usually not on.
I am surprised to find that a group that normally would support states' independence and states' rights is saying to these states that want this tax, you can't have it. Now either these states have the right to tax commerce within their borders, or maybe we go from a one-world vision to a one-country vision. I mean, just abolish state borders?
Tyler: I don't think that's going to happen, I think it's the competitive nature of the governments. What they need to figure out is that more is less and less is more.
Pizzo: A lot of these are Republican governors.
Turner: The states' rights argument, though, I think is something of a misnomer. I know that a lot of Republican governors out there have argued about states rights. But that all fits into the context of the Constitution. If you go back and read the Federalist Papers, and you may not think they have application in the context of e-commerce, but they really do. Madison talked extensively about how there needed to be Federal power in order to limit the states from dealing with tax commerce that's going intraborders.
Tyler: According to Congress, the clause could allow Internet taxation. between the States. They have chosen not to. The Constitution doesn't say you can't do it. It gives the Congress the power to do it, and they've said, "No, we're not going to."
Pizzo: I'm going to direct this at Hut. Somebody once asked on a different subject why it was so hard to implant capitalism in the former Soviet Union, and a Russian told the following joke that sort of tells why. There were two neighbors living across the road in a rural area. One had a cow and one didn't. The one with the cow was able to sell milk and had more money. The one who didn't one day went to the door, and there was a genie there that said, "You have one wish. What is your wish?" And her wish was "Kill my neighbor's cow."
Is that sort of what the independent booksellers are saying in asking the State to tax the online people -- kill my neighbor's cow?
Landon: I don't think so at all. I want to make clear that we're not opposed to the Internet. We're all going onto the Internet ourselves, with our own sites, which we have to pay and collect tax on. The notion that if someone goes to barnesandnoble.com and now suddenly has to pay tax on it, suddenly that's going to drive them back to my store and somehow hurt Barnes and Noble, because people aren't going to shop there anymore, I think is a little bit much. It certainly makes a difference--we just want to compete.
I really think this is an issue of retail is retail is retail. The fact that you can go to barnesandnoble.com and buy a book and return it at a Barnes and Noble store -- to say that that barnesandnoble.com doesn't have a presence in California and isn't doing business in California is ludicrous. Barnesandnoble.com is just another arm of Barnes and Noble in this instance.
Turner: But you use facts that don't exist in the context of the statute that is being proposed by the bill. If you're talking about where someone buys from barnesandnoble.com and returns it to Barnes and Noble--although I don't think the specific issue necessarily has been litigated -- but I would think that that creates real nexus issues. I think that there are probably a lot of people who would suggest that that probably is nexus. I think the bill goes kind of beyond that, though.
Landon: Well, it says more than that, but that's part of cross-promotion.
Turner: But that's existing law. I think if they're taking returns from the dot-com affiliate, I think that that's within the context of nexus under current law.
Landon: I would love to have you tell the Board of Equalization that, because when we told them that, they said no.
Turner: I don't think that's actually accurate of what the BOE said on that issue.
Landon: Actually what they said was, they weren't willing to.
Tyler: Well, understand where they're coming from. Having been on the other side of some of their audits and such, I know that they're pretty aggressive, and particularly on nexus.
It may not happen as fast as the Internet economy seems to be developing. After all, taxation issues aren't known for their speed of enforcement to begin with. To suggest that the BOE (which I think is a part of the unfortunate premise of the bill) is not enforcing the law, I think is a misconception, and I think a misrepresentation of what has actually been going on with the BOE.
Landon: Okay, well, I'll accept that. The BOE has done nothing and has given us no--
Tyler: No, you have no evidence that they've not done anything, which is really different--
Landon: They have, that's true.
Tyler: That means that you're not going to feel at ease until you feel like Barnes and Noble is being essentially brought up on audit on these issues. But I can just say that I think that the cure is kind of worse than the disease.
Stephen Pizzo is an award-winning non-fiction author, and newsman for the O'Reilly Network.
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