Bradner's column: Resistance is futile

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.

Congress last year passed the Internet Tax Freedom Act, which provided a moratorium on the imposition of new taxes that single out electronic commerce or Internet access. The act actually has a misleading title because it set up a commission to make recommendations to Congress on how to tax Internet-based commerce. While the act sounds neutral about imposing taxes on Internet sales, the reality of sharply increasing sales over the Internet is that taxes will follow.

The tax 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 $US4 billion in tax revenue is "lost" each year through the ground rules that the Supreme Court has imposed on mail-order sales. "Lost" to taxation authorities means "found" by consumers. At only about $170 million, Internet-related tax losses are currently inconsequential. But these losses are expected to grow dramatically over the next few years.

The US Department of Commerce 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. I'm sitting in my house in Cambridge, Massachusetts, and I place an order with LL Bean, which officially is located in Maine, but uses a phone bank or Web server located in Oklahoma. I pay with a credit card from a company that has its corporate headquarters in New York and uses a data processing centre in Connecticut. Meanwhile, the product is shipped from a warehouse in Georgia. Just who should get what revenue if a transaction such as this is taxed?

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

The commission defined by the Internet Tax Freedom Act met a few weeks ago, and it was clear from the opening remarks that commission members expect to determine a way to tax the Net. The clearest results of the first 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 the commission's mandate, I would not be all that surprised to see the group include taxes on mail-order sales in its recommendations.

This is a very difficult 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.

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