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Internet
Jobs, Not Taxes
Virginia
shouldn’t relinquish
competitive
advantages in Internet
retailing
for unproven
theories of tax policy.
A
slow day in August is a good time to look at the
book shelf below the computer and rediscover a fat
paperback entitled “Internet Starter Kit:
Everything You Need to Get on the Internet.”
Wipe the dust off the second edition for
Macintosh dated 1996. Pull out the disks inside
and review how to install Eudora 1.4.3, billed as
the most popular program for Internet email, and
the powerful TurboGopher 1.0.8b4, which “enables
you to browse the information resources in
Gopherspace, a collection of more than 1,500
information services around the world.” Wow!
Looking back from 2004 reminds us how romantic the
Internet looked then. The kit authors promised to
make clear why the Internet is so “wonderful"
(and I mean that in all senses of the word,
especially the bit about being filled with
wonderment). They unabashedly termed the
Internet “one of humankind’s greatest
achievements.”
Virginia built its Internet and information
technology industries as that Internet starter kit
experience was replicated by tens, then hundreds
of millions of people and businesses a year
worldwide. And as pointed out by Vice President of
the Northern Virginia Technology Council Josh Levi
before a General Assembly joint subcommittee
August 16 in Richmond, it would be
wrong, therefore, to relinquish the Commonwealth’s Internet
business advantages to unproven theories of tax
policy.
That the Commonwealth is a technology state is
beyond argument. Technology employment in Virginia
is growing toward 450,000 statewide and provides
over $7 billion in annual payroll, over 20 percent
of the state’s total. Technology wages average
over $66,000, significantly above the less than
$38,000 average of all jobs in the state. Citing
statistics from the U.S. Department of Commerce
and the Milken Institute, Levi reminded the panel
that the Commonwealth of Virginia is first among
states in technology concentration, the degree to
which the state economy is fueled by the tech
sector.
Unfortunately, a fixation on collecting sales
taxes on remote Internet sales in other states
(many of which shrug off an income tax comparable
to Virginia’s) began some years ago to muddy the
water on the benefits of e-commerce. One study by
the National Governors Association, National
Conference of State Legislatures and National
Conference of Mayors went so far as to call the
Internet a threat to the fiscal health
of states and cities because courts had ruled
that forcing businesses in one state to collect
sales taxes for another state was burdensome.
Advocates for taxes on Internet sales circulated
wildly exaggerated estimates that hundreds of
billions of dollars in potential state revenues
were being lost. Many wrung their hands about the
unfair tax advantage e-tailers had over
traditional retailers.
What such comments then and now ignore, of course,
is that the benefits of e-commerce -- and the
administrative savings and efficiencies of
delivering citizen services through e-government
-- far outweigh revenues foregone on taxes on
transactions. Consider just one estimate by the
U.S. Department of Commerce years ago that a
traditional banking transaction at a teller window
costs $1.07, via telephone $0.52, through an ATM
$0.27 and via the Internet $0.01. Achieving a 99
percent savings in the cost of transactions,
promoting competitiveness and creating more jobs
and tax revenues as a result, is a more reasonable policy
and economic development goal than taxing the
transactions.
Further, more recent studies indicate that 75
percent of all business-to-consumer sales online
are by the same retailers that dominate
traditional retail sales channels. So, the big
competition for small retailers, whether in
Virginia or elsewhere, really are BigBox and its
BigBox.com, not small e-tailers.
Virginia technology policy and elected officials
generally have championed policies to grow
technology businesses and jobs, expand Internet
access for businesses and citizens and use the
speed, accurate, automated processes, convenience
and efficiencies of e-commerce. So, it was with
some concern in 2003 that Gov. Mark R. Warner
and two legislators participating in a multi-state
discussion on collecting sales taxes on remote
(catalog and Internet) sales appeared to recommend
an expanded role and a new tax regime that would
threaten Virginia’s technology industry
leadership position. Speaker of the House William
J. Howell, R-Fredericksburg and the House Finance
Committee blocked such a step in favor of the HJR
176 study resolution of Del. Timothy D. Hugo,
R-Centreville.
Several states adopted the Streamlined Sales and
Use Tax Agreement (SSUTA) in November 2002 as part
of an effort to reduce the burden on
businesses collecting taxes on sales to in states where those
businesses did not have a physical
presence. By focusing on simplifying the
differences among states in sale tax systems,
including the adoption of more common definitions
of what is and is not subject to sales and use
taxes, the SSUTA hoped to make it easier to
collect sales taxes across state lines.
What NVTC’s Levi reminded the joint subcommittee
chaired by Del. Hugo, however, is that
Virginia-based e-commerce companies, just like
traditional sellers, already collect and remit
sales taxes to Virginia on sales to Virginians.
Virginia e-tailers and retailers alike function
within one system, with one tax rate, with one set
of rules and one audit. Similarly, Virginia
consumers have one use tax to pay on all remote
sales above the $100 a year exemption extended by
the Commonwealth.
Under a new SSUTA-inspired regime, however,
Virginia e-tailers, unlike traditional sellers,
would have to collect taxes for every state where
they gain a customer, whether the e-tailer has a
physical presence in that state or not. Virgina e-tailers
would face multiple systems, multiple tax rates,
multiple sets of rules and multiple audits, a much
heavier burden than traditional single-state
sellers. Further, Virginia would shift collection
of the consumer use tax from Virginians to
businesses and sellers in other states, many of
which still have different tax rules.
Texas, South Dakota, Hawaii and Connecticut, Levi
pointed out, have sales taxes on services,
including data processing, information and
engineering services. Would Virginians have to pay
sales taxes on remote services in other states
when they do not have to do so in Virginia?
Kentucky on July 1 began to tax sales of
downloaded software, the same date Virginia made
clear software downloads are not subject to sales
taxes.
Further, as Levi relayed, there remain serious
disagreements on sourcing rules, which would shift
credit for tax revenues collected from where goods
are sold to where goods are destined. These
sourcing rules could shift substantial tax
revenues among localities in Virginia and give
traditional sellers fits, which is why Gov.
Warner proposed adopting SSUTA without its
sourcing rules. Yet, uniformity in sourcing rules
are a prime objective of SSUTA and a requirement
of Congressional legislation, such as S. 1736
introduced in October 2003, needed to require
states to collect sales taxes under an SSUTA-type
agreement.
The technology industry’s conclusion that the
SSUTA is still a work in progress in need of
further study is, more than anything, pragmatic.
Expanding tax collection responsibilities to and
for dozens of other states could increase the
compliance burden on Virginia tech businesses and
e-commerce in the Commonwealth. Most importantly,
it could erode Virginia’s comparative advantage
in growing and attracting technology companies,
even unwittingly increase the attractiveness of
offshore locations for Virginia jobs.
Those outcomes would be a high cost indeed to
collect what likely is a modest amount of
potential new revenue. NVTC’s Levi documented
that 90 percent of all remote sales now are
business-to-business. Virginia already collects
those use taxes. Only ten percent of remote sales
are business-to-consumer and many high volume
consumer online transactions, such as airline
ticket sales and stock trades, are not subject to
sales tax. Ninety-four percent of the nation’s top
retailers already collect sales taxes in all
states where they have a physical presence. So
while there may be room for some efficiencies and
stricter enforcement, any new sales taxes
collected on Internet sales are likely to be
modest and finite, not a gold mine.
Other non-technology states have their own
economic development strategies, such as forgoing
a state income tax or regulating the Internet.
Levi and others are arguing for the policy choice
and an economic development strategy that
establishes Virginia as a preferred location for
large remote sellers, who can add jobs in
Virginia. Income taxes, property taxes and sales
taxes on sales made to Virginians then boost
public revenues without new burdens on Virginia
businesses to collect taxes on sales to other
states. The joint subcommittee’s recommendations
should be the newest edition of the Internet
Starter Kit.
--
August 23, 2004
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