A not so simple sales tax

I recently did a Capitol Hill briefing for Congressional staffers on the arcane subject of Internet sales tax, including the so-called Streamlined Sales Tax Project (SSTP).

Before diving into the indecipherable details of the SSTP, I shared with audience an analysis of my own online shopping experience this past holiday season.

I bought at 14 different websites, ranging from Amazon to L.L.Bean to RestorationHardware.com.  And 12 of these 14 web retailers automatically collected my Virginia sales tax, covering 95 percent of my online purchases.

That shouldn’t be a big surprise, since current law already requires websites and catalog retailers to collect sales taxes for any state where the business has a physical presence.   But, in fact, my experience did turn out to be quite surprising to some in the audience (and to one of my fellow panelists!) They thought that all Internet purchases were somehow exempt from state and local sales tax. They assumed that the federal moratorium on Internet access taxes also covers sales tax on purchases made online. But Internet access taxes and online sales taxes are two entirely different things.

And why didn’t those other two sites collect my Virginia sales tax?  Because back in 1992, before e-commerce had even been invented, the Supreme Court ruled that state sales tax systems are so complicated that they represent an unconstitutional burden on interstate commerce. Thanks to that ruling, states can’t force catalog sellers and e-commerce sites to collect local sales taxes unless the seller has a physical presence in the state.

State and local officials, always hungry for new sources of revenue and imagining a huge pot of gold at the end of the Internet rainbow, are now trying to get around that Supreme Court ruling by creating the SSTP in an effort to standardize and simplify their sales tax systems.

But simplifying local sales taxes is turning out to be anything but a simple process. So far, only 15 states have implemented the changes. The rest are figuring out that "simplifying" their sales taxes can’t possibly generate enough new revenue to justify the complicated changes and increased cost of collection required by the SSTP.

Seeing what’s been going on around the country, SSTP proponents are getting anxious. They want Congress to step in and require that sellers everywhere (even those in states that don’t even have a sales tax) start collecting sales tax for any state that meets the SSTP standards.  But, in addition to being complicated for the states to implement, the "simplified" SSTP system will be enormously burdensome and expensive for online retailers, especially small businesses trying to reach larger markets through e-commerce.

And what about that five percent of my holiday purchases on which the online retailer didn’t collect my sales tax?  Well, it may surprise you to learn that state law says that when I buy something from a website or catalog that isn’t required to collect local sales tax, I’m supposed to pay what’s called a "use tax" instead.  Not to worry. That also came as a big surprise to many in the Hill audience. I guess they haven’t been volunteering to pay their use taxes either!

I expect that a lot of people will be just as surprised as those folks on Capitol Hill when they figure out just how complicated it really would be to “simplify” sales tax collection.

I hope  those Congressional staffers were listening carefully.

VoIP in Virginia

Some encouraging regulatory news from Richmond, Virginia.

Legislation that would limit state regulation of VoIP service was just recommended by a Virginia General Assembly committee by a vote of 21-0. The bill (HB 1885) would close a loophole in the current Virginia law that allows the state to regulate any VoIP service that is not interconnected with public switched telephone networks.

By making it clear to state regulators that they should keep their hands off VoIP this bill reduces uncertainty for Virginia businesses and consumers and helps ensure a more predictable regulatory climate that will encourage innovation and investment in new communications services.

Other states that might be tempted to regulate innovative Internet services like VoIP should follow this new view from the Old Dominion.

Relax. The United Nations is here to help

Relax. The United Nations is here to save the Internet I’m in Athens (Greece) for the first meeting of the Internet Governance Forum (IGF), a United Nations initiative to increase international oversight and capacity for governing the Internet. Makes you wonder how the private sector managed to invest a trillion dollars to serve a billion people on the Internet thus far, without the benefit of UN “governance”. But something as big as the Internet just begs to be governed, so here we are.

To be sure, the IGF crowd is gathered here to talk about some very worthy goals for the Internet: openness, security, diversity, and access—all focused on the needs of developing nations. But whenever the UN convenes a meeting about the Internet, thoughts turn to taking over the role of ICANN (Internet Corporation for Assigned Names and Numbers), even though ICANN has only a limited technical role in managing the domain name system.

That’s why I’ve come to Athens—to provide a kind of firewall to shield ICANN from having its job usurped or expanded by the UN, governments, and civil society advocates. So far, the ICANN firewall is holding up under an expected and relatively mild assault.

Yesterday, Iran’s Dr. Riazi insisted that IGF focus on stripping root server oversight away from the U.S. government. Although the moderator called this issue “the elephant in the room,” none of the panelists has yet to suggest that root server oversight is a concern or that it plays any role in achieving the goals of the IGF.

Yin Chen of China’s Ministry of Information Industry warned that his nation would not allow the Internet to threaten national security or influence the psychological development of China’s youth. Kids in China can’t be too happy about that, and I shudder to think of China and Iran marshalling their allies to enlist ICANN in blocking offending websites.

Today, The Diplo Foundation questioned whether market forces can be trusted to preserve free flow of information on the internet. Those same market forces helped create an explosion of freedom and diversity in information and communications on the Internet, and the private sector continues to be the driving force at ICANN.

Privacy advocates took some shots at ICANN for its Whois service, a tool used in consumer protection investigations and to help trademark owners find cybersquatters. While some want to limit use of Whois data, a wise man from Japan’s IT industry said ICANN should enhance Whois to help track-down sources of spam and security threats.

Tomorrow’s forums will focus on improving access and diversity. Expect ICANN to be called on the carpet for failing to implement multilingual characters in top level domains, a responsibility that rightly belongs with ICANN. And we’re likely to hear calls for getting ICANN into the access business—perhaps a domain name tax to fund infrastructure in developing nations? Stay tuned.