Online taxes may force hard choices on U.S. consumers

Bill Pickard is an online retailer's dream. He often buys toys, books and music online. His most frequent purchase: plane tickets for his Seattle management-consultant business.

Like the average U.S. consumer, though, Pickard is sensitive to price. Should online retailers begin charging a tax for goods sold online — in addition to shipping costs — he wouldn't mind taking his business elsewhere.

"You have to look at the total cost of the item," he said. "I don't care if it's a tax. It's about the bottom line."

Pickard and other online shoppers may have to choose whether to absorb these costs sooner rather than later. The push to tax goods sold online has intensified in recent months as e-commerce companies receive pressure from local governments here and abroad.

Starting tomorrow, the European Union will begin collecting a value-added tax, or VAT, on digital products or auctions administered online by companies in the United States and other non-EU countries. The tax would boost the total cost of products sold to European consumers as much as 25 percent.

While the VAT applies only to specific merchandise — such as the e-books Amazon.com sells or the Internet services America Online provides — it shares a common principle with the push to tax all goods sold online in the United States. Both are attempting to collect tax from retailers that have no physical presence in their jurisdictions.

Adam Thierer, director of telecommunications studies with the Cato Institute, said collecting taxes for remote sales amounts to taxation without representation, since these companies don't enjoy the benefits of a physical presence in these locations.

"Do the ends justify the means?" he said. "For (governments), the easiest way to skin this cat is to demand the vendor collect this tax, no matter what the burden."

In the United States, consumers who purchase goods online only pay a tax if that company has a physical presence in their state. Washington residents, for instance, are charged a sales tax when they purchase goods at Amazon.com (it's headquartered here) and Wal-Mart (it has stores here).

Catalog decision

But e-commerce companies do not have to collect sales tax on behalf of other states because of a Supreme Court decision related to catalog retailers. The court ruled that varying tax rates are too complex and, thus, present an unfair burden.

Cash-strapped states have looked to Internet sales as one potential new source of revenue. Washington estimates it loses $200 million in sales tax each year, $140 million of which results from Internet and catalog orders outside its borders.

More than 30 states, including Washington, have collaborated on streamlining sales tax to make it easier for Internet and catalog retailers to collect taxes on their behalf. In some states, for instance, water is taxed because it's not considered a food item, while in other states it's exempt.

Mike Gowrylow, spokesman for the state Revenue Department, said simplification of sales taxes is only the first step. "Ultimately, nothing will happen until Congress decides that the states have worked together to lower the burden and it makes sense to begin collecting sales tax," he said.

Non-EU countries have two options for paying the tax that begins tomorrow. Under one scenario, the company would have to determine the customer's location, calculate that country's tax and forward the payment to the right government entity.

Amazon plans to charge VAT on sales of downloadable software and e-books, plus the commissions it collects for online auctions. Meantime, eBay plans to assume the VAT on behalf of consumers in smaller European countries, such as France and Italy. In Germany and the United Kingdom the company will increase fees to reflect the tax.

In its annual report, eBay said it expects the costs to be "substantial."

Second option

Another option would be to establish a physical presence in a European Union country and charge customers that tax rate. AOL, which has 6 million Internet users in Europe, opened an office in Luxembourg. That country's 15 percent VAT tax is substantially lower than other EU countries, such as the United Kingdom, Denmark and Sweden.

Meantime, the push to tax goods online should receive increasing attention. In 1998, the U.S. government barred states or other local authorities from imposing new taxes on Internet access for three years. The moratorium ends Nov. 1.

Forrester research director Kate Delhagen said the impending deadline would probably incite a larger discussion on what Internet goods and services should be taxed.

Internet retailers, she said, should quit lobbying to stop changes and spend that time and money enhancing their sites. "We think it's inevitable."

Monica Soto: 206-515-5632 or msoto@seattletimes.com