Skip to main content

Interesting stuff going on behind the scenes this week in the Internet-taxation area; time for an update. (Actually, I meant to get this to you Wednesday, but the Web vandals

story intervened. Priorities, priorities.)

When I last

wrote about possible Net taxes and their likely effect on investments in Net companies, I reported that the "business caucus" of six Web-connected companies on


Advisory Commission on Electronic Commerce

were working quietly to put together a compromise they thought they could sell to the other members.

That group includes high-level representatives from

Charles Schwab



America Online






Time Warner





, and

MCI WorldCom


. Since this "Group of Six" probably constitutes the swing-votes coalition, they were pretty sure that a reasonable compromise could be pushed through.

After all, since the rest of the Commission is split, with five resolute "no-Net-taxes" members, and five members eager to tax Net sales, a coalition between the six business caucus votes and


of those other blocs would carry the day when the Commission meets in Dallas in March to vote on its final recommendations to Congress.

Looks more and more like the business group was right, and something like their proposal will carry the day.

Tuesday night, Group of Six members sprung their proposed compromise on the other members of the Commission. It was about as expected: no taxes, ever, on access to the Net (in other words, no taxes on ISP accounts, fast-access charges from phone and cable companies, etc.) and a several-years-long extension of the current ban on taxes that applies solely to Internet transactions, with encouragement for the 50 states to act during that time to develop a coherent and consistent sales tax program. (This would not be a national sales tax, just a "leveled" tax, still administered and collected by the states, according to their own

presumably realigned state laws.)

But the proposal that came out Tuesday night had an odd twist. In an effort to deliver equity -- a concept which is, we should always remember, very much in the eye of the beholder -- the business caucus proposed banning state sales taxes on several categories of goods, including books, music and records. The exemption from sales tax would apply not just to purchases online, but also to goods bought in conventional bricks-and-mortar stores. (Or, one presumes, over the phone or through the mail from a catalog reseller.)

In return for going along with the deal, the states would get the right, after expiration of the moratorium, to tax Net sales on the nonprotected categories of goods.

The caucus' proposal also encourages Congress to come up with a new and formal definition, in Federal law, on the exact meaning of "nexus," or physical presence for a reseller. In the past, federal court cases over states' efforts to tax out-of-state sales -- in particular the landmark case of catalog stationer


in the early 1990s -- relied on the notion of nexus to determine what could and couldn't be taxed.

A business was determined to have nexus in a state -- that is, a legal, taxable presence -- if it had


kind of physical presence there. Thus a Nevada company which had a one-person repair office in New Jersey was deemed to be subject to sales taxes by New Jersey, at least on shipments to customers living in New Jersey.

They Say, You Say

Your notes on that first column, and the business caucus' budding proposal, were fascinating.

About 75% of the 200-plus notes I got were flatly opposed to any new tax on sales over the Net -- ever, period, no matter what. Another 20% thought it was naive and maybe mean-spirited for me to suggest that taxing Net-based transactions was wrong. How else, the writers of those notes wondered, could cities, counties and states ever replace the flood of present sales-tax collections that would go whooshing out of those cities, counties and states, as the Internet economy took over?

A final 5% agreed with the previous group, and thought I also somehow missed the essential unfairness of any no-taxes-on-Net-sales proposals. Wasn't that just a federally imposed subsidy for Net retailers, they wondered, over local bricks-and-mortar retailers?

One reader called the notion of "no-Net-taxes" a "despotic and illegal federal subsidy of




And since I'd said I think a national sales tax in the U.S. would be a horror, one reader wrote to me, bizarrely, about the glories of the GST tax in Ontario, Canada, and the "highly successful" VAT tax in Great Britain.

(I pointed out to him how Ontario's GST tax led to massive cross-border shopping by Canadians -- followed, of course, by tax-free smuggling of those purchases back home. And I pointed out that the VAT is widely despised in England, and has led to heroic tax-avoidance measures. What I should have said was "Give me a hit on that doobie, son.")

I haven't changed my mind -- I'm still opposed to Net taxes -- but I think it's pretty clear how the endgame will be played out here, at least in regard to the commission's decision next month in Dallas.

I take some comfort in knowing that Congress is most unlikely to levy any new taxes after their report is received in this election year. And that Washington's inevitable review process of the report is likely to consume most of another year.

But taxes on Net transactions are coming, and holders of B2C stocks should make their own decisions about how those taxes will affect consumers' buying habits on the Web.

My prediction: The effect won't be positive.

Jim Seymour is president of Seymour Group, an information-strategies consulting firm working with corporate clients in the U.S., Europe and Asia, and a longtime columnist for PC Magazine. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. At time of publication, Seymour was long MCI WorldCom, although holdings can change at any time. Seymour does not write about companies that are current or recent consulting clients of Seymour Group. While Seymour cannot provide investment advice or recommendations, he invites your feedback at