Moratorium allows time for governments to figure out Internet taxation issues

The growth of e-commerce as a means of selling products and services via the Internet has brought attention to the way state and local taxes are applied to Internet purchases. Shopping via the Internet is similar tax-wise to shopping via catalog – if a store does not have a physical presence in a state, that state cannot compel the store to collect state sales tax on an item purchased by a customer living in the state.
Catalog sales aren’t tax-free – income tax forms contain a line for use tax, on which consumers are supposed to indicate how much they spent on goods purchased out of state. But state and local officials around the country fear that tax filers don’t honestly pay use taxes, and with the boom in Internet shopping states stand to lose big money.
Last October Congress passed the Internet Tax Freedom Act, which imposed a three-year moratorium on Internet taxation and called for the formation of a committee to study the issue.
“The act isn’t meant to give Internet business preferential treatment,” said Jim Eads, a partner at Ernst & Young LLP’s Atlanta office. “The point is to make sure state governments can’t single out and tax commerce occurring via the Internet that will put it at a disadvantage vis-a-vis other commerce.”
From the small-business-point-of-view, the Internet provides a relatively inexpensive opportunity for entrepreneurs to start a business. Start-up costs are lower because a physical store is not needed necessarily, and the Internet allows for global exposure of a business.
“There is a huge opportunity for small businesses on the Internet, but many small businesses don’t have time to think about going online,” said Chris Zuzick, a vice president with Anderson/Roethle, Inc., in Milwaukee. “Fear of extra taxes will just prevent small businesses from using the Internet to their advantage.”
In addition to the issue of taxing products and services sold over the Internet, taxation of Internet access also is a concern the Internet Tax Freedom Act will address, Eads said. The moratorium applies to Internet access, and opponents of state-taxed Internet access say such a tax system would undermine the potential the Internet has for business.
“If Internet access is taxed, small businesses might look at it as an unjustified expenditure they can’t afford,” Zuzick said. “That will further prevent companies from using the Internet to grow their business.”