Gov. James Gillmore
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Companies Hold Firm To an E-Tax Future
By Steve LeSueur, Staff
Writer
Companies that see a bright future in helping state and local governments
collect sales and use taxes on Internet transactions will not be stopped in
their tracks by what a national commission studying the tax issue recommends
in its report to Congress in April.
Although a nationwide framework for e-commerce tax transaction processing
may be years away, “specialized software companies already are positioning
themselves as sales tax calculators, collectors and remitters,” Erik Olbeter,
a senior analyst for Schwab Capital Markets and Trading Group of the Charles
Schwab Corp., San Francisco, said in a recent report.
Indeed, the market for providing tax solutions that calculate and remit
taxes could reach $600 million by 2004, according to the Feb. 14 report
authored by Olbeter, “Ecommerce Tax Transaction Processing.”
In addition, the European Union is preparing to require soon the
collection and remittance of value-added taxes on online sales to European
residents, and Japan is expected to follow.
“There is definitely a massive market out there,” said Shawn Fahey, vice
president of business development and co-founder of esalestax.com Inc. of
Englewood, Colo. Founded in June 1999, the 12-employee company is building a
software system for both e-merchants and government taxing authorities that
should be ready by the end of the year, Fahey said.
“We’re going to see more competition in this market,” said Dan Sullivan,
chief executive officer for Taxware International Inc., Salem, Mass. Taxware
has been providing tax compliance software to businesses since 1964 and, with
estimated revenue of more than $20 million, is regarded as the major player in
the online tax collection arena. “It’s going to be very attractive,” he said.
The Advisory Commission on Electronic Commerce, a group of 19 government
and industry leaders, holds final deliberations March 20 and 21 in Dallas on
whether to recommend taxing Internet transactions. The commission, which has
been deeply divided on the issue from the beginning, is not expected to reach
consensus on this central question.
The commission was established by the Internet Tax Freedom Act of 1998,
which placed a three-year moratorium on any new taxes while the panel studied
the issue of whether and how to tax Internet transactions. It is chaired by
Gov. James Gilmore (R) of Virginia. The moratorium ends October 2001.
Under law, a business is not required to collect use taxes on a product if
it does not have a significant physical presence, or “nexus,” in the state
where the purchaser resides. Purchasers still are required to pay those taxes
themselves when they file their state income taxes, but relatively few
citizens do. Consequently, most mail and telephone catalog purchases are, for
practical purposes, tax free.
With the dramatic rise of Internet commerce, state and local leaders are
worried about the potential dwindling of tax revenue to pay for police,
schools and other public services.
At the same time, brick-and-mortar retailers fear that they are operating
at a disadvantage when shoppers can go online and buy products tax free, which
amount to discounts of 5 percent or more.
Gilmore, whose state is home to Internet giant America Online Inc.,
staunchly opposes taxing Internet transactions. Gov. Michael Leavitt (R) of
Utah, also a commission member, regards the current policy as unfair to
traditional retailers and as potentially damaging to state tax coffers. He is
leading a faction that wants to consider ways to collect online taxes.
A recent report by Forrester Research Inc. estimated that U.S. citizens
paid only about 20 percent of sales and use taxes owed on Internet purchases
of $13 billion in 1999. Of $665 million in taxes owed, only $140 million was
paid.
By 2004, online retail sales will reach a projected $184 billion, which
means that the sales and use tax liability will be an estimated $8 billion,
according to the Cambridge, Mass., research company.
“State governments won’t walk away from $8 billion,” said Steven Kafka, an
analyst in e-business trade for Forrester.
Kafka predicted that, because technology reduces the tax-collection burden
on out-of-state businesses, the Supreme Court will reverse its 1992 ruling
that limits the responsibility of businesses to collect taxes on Internet,
telephone and mail-order purchases.
“Technology changes the equation” on the Supreme Court ruling, not just
for Internet sales but also for telephone and mail order sales, Kafka said. “I
think the technology is there to support collecting taxes on all remote
sales.”
While Leavitt and other government leaders also are looking to simplify
sales taxes as a step toward collecting online taxes, industry officials said
their software systems could handle the jumble of product definitions and tax
rates among the approximately 6,000 state, county and city taxing
jurisdictions.
“We would like to see them simply the tax codes, but it could be done
today with existing technology,” said Sullivan. In fact, Taxware already has
thousands of business customers for whom it is collecting taxes on Internet
transactions, he said.
The Sales Tax Clearinghouse of Wilmington, Del., is another company
jumping into the market. Formed in August 1999, the company announced
Feb. 15 its solution for collecting and remitting sales and use taxes.
The Sales Tax Clearinghouse, which has under 20 employees, already has some
business customers, said Clifford Farmer, company president, although he
declined to say how many.
Other companies also are expected to enter the market. Schwab’s Olbeter
listed a half-dozen companies that could take advantage of this market,
including American Express Co., New York; First Data Corp., Atlanta; General
Electric Capital Corp., Stamford, Conn.; and Vertex Inc., Berwyn, Pa., the
market leader in offline tax transaction processing.
Under the business models now under discussion by government and industry
officials, the government would pay for the collection and remittance of sales
and use taxes so that the taxes would place “zero burden” on businesses.
Currently, about half the states allow businesses to retain a small percentage
of sales and use taxes for administrative purposes.
The early innovators will have an opportunity to grab a significant portion of a growing market, but some of the smaller companies also might become takeover targets of larger Internet transaction companies, such as CyberSource Corp of San Jose, Calif., or Cybercash Inc. of Reston, Va., Olbeter said.