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On Tax Day, a Taxing Year (Already) on Internet Commerce

Internet tax man It’s April 15, so hopefully nobody’s waiting in long lines at the post office (though we think you should be using the Internet to file electronically). Unfortunately, it’s only April but already it has been a taxing year for online commerce.


We’ve seen six tax-related categories of bills that have been introduced in state legislatures this year: (1) Privacy-invading purchase reporting laws; (2) Bounty hunter bills; (3) affiliate advertising as a nexus for requiring sales tax collection; (4) imposing hotel taxes on online travel companies; (5) expanding Internet sales taxes based on inadequate simplification; and (6) new taxes on digital downloads.  


Colorado law turns online companies into the purchasing police (and snitch)


Colorado passed HB 1193 earlier this year (it takes effect in May), and in an effort to get consumers to pay the use tax on Internet purchases it requires out-of-state companies to share purchasing data with the state Dept of Revenue.


Out-of-state retailers must track and report the purchases of Coloradans and: (a) file an annual statement with purchase data for each purchaser to the Department of Revenue; (b) send buyers a summary statement of all their purchases so they know how much use tax to pay (like a 1099 form we receive on investments, only would it be called “Form 1984”?); and (c) on every invoice and receipt, notify Colorado purchasers of their need to file a sales and use tax return with the state; Colorado’s Department of Revenue will now know all the vendors where residents made online or catalog purchases from remote sellers. This would include sensitive items of a particular kind of merchandise — sex items, specialty books, items that reveal political views, etc.


Declan McCullagh wrote a good article on this yesterday. California has an almost identical bill pending (AB 2078). So does Tennessee (HB 1947).


Deputizing plaintiff’s lawyers to sue for uncollected taxes


Georgia (SB 512) was a “bounty hunter” bill that would give the state revenue commissioner broad authority to to hire contractors on contingency to go after uncollected sales taxes. It would authorize payment of contingency fees to lawyers who successfully sue remote online retailers to enforce collection obligations. The bill failed to meet the legislature’s crossover deadline, so it’s effectively dead this year.


Affiliate nexus laws are an unconstitutional expansion of sales tax burdens to out-of-state businesses.


Colorado (SB 1193), Connecticut (HB 5481), Illinois (SB 3353), Maryland (SB 824), New Mexico (HB 50), Virginia (SB 660) and Vermont (HB 661) introduced bills declaring that some forms of Internet advertising are equivalent to having sales agents in their states. California’s Senate Budget and Fiscal Committee passed a budget report that includes an advertising nexus tax. All these states want to force out-of-state advertisers to collect and remit sales tax on sales to their residents.


Advocates believe the measures will raise tax revenue, but that’s a false hope, as seen in states that enacted this law in 2009. Moreover, fewer advertising dollars would flow to in-state websites, costing income and jobs. State laws that use Internet advertising as a proxy for an in-state sales representative will stunt the growth of new business models and distort the evolution of Internet marketing.


Imposing hotel taxes on services provided by Online Travel Companies—the wrong tax for the wrong jurisdiction


Local governments want to levy their double-digit hotel occupancy taxes on service fees charged by online travel websites. New York City passed an ordinance, the state of Florida considered legislation and sued Expedia and Orbitz, and 67 other municipalities have filed lawsuits.


In Jan-2009, the Multistate Tax Commission recommended a model bill to impose hotel taxes on service fees charged by travel agents. But treating online intermediaries as hotels is the wrong approach — service fees should not be taxed the same way as a hotel room charge.


NetChoice is now working with the Streamlined Sales Tax Governing Board and with NCSL to evaluate an alternative proposal that taxes agent services as a service rendered to the traveler booking the room.


Expanding Internet sales taxes, based on inflated expectations and inadequate simplification


Overblown tax revenue estimates are luring states into a system where costs could outweigh benefits. Florida and Virginia are the latest states betting on inflated tax collection estimates if they embrace a nationwide sales tax regime called the Streamlined Sales Tax (SST).


For a decade, the SST sought to reduce the burden of sales tax collection on interstate commerce, as held by the Supreme Court’s Quill decision. However, the SST is not nearly simple enough.  Moreover, recent research proves that the lost revenue from taxes on out-of-state purchases is grossly overstated.


New taxes on digital downloads of music, movies, books, games, and software 


Colorado (HB 1192), Indiana (SB 250), Wyoming (HB 29) and Vermont introduced legislation—and Oklahoma introduced a budget proposal—that would impose new sales taxes on digital downloads.


States are looking everywhere for new revenue, but it doesn’t make sense to add taxes to digital downloads, the greenest way you can get music, movies, books, games, and software. Instead, states should be encouraging behavior that avoids round trips in the car, warehousing, and the use of plastic and packaging.


Moreover, some state tax administrators wrongly contend that digital goods are the equivalents of offline products.  Just ask the Kindle users whose books were ‘recalled’ by Amazon. Finally, these bills place in-state businesses at a disadvantage to out-of-state competitors, who wouldn’t have to collect the sales tax when selling the same downloads to in-state customers.


-Braden Cox